Automakers navigate challenging times

The global automotive market is not nearly as strong this year as had been expected, largely due to the effects of such supply chain issues as the semiconductor chip shortage, although that has partly been moderated by increased demand for electric vehicles, which is being further bolstered by the diverse assortment of models being offered, including light truck options.

"It is a very unusual, unseasonal and unprecedented situation across the automotive sector," Philip Nothard, insight and strategy director for Cox Automotive International, said. Mike Wall, automotive analyst for IHS Markit, agreed, noting that while normally it is vehicle demand that drives automobile output, given the automakers’ need to produce vehicles at the rate required to meet that demand, currently it is a very different situation, with production – and vehicle supply in general – driving sales, given the constraints on supply.

While global auto production in the year to date into July had been about 15% higher than a year ago, Christopher Plummer, managing director of Metal Strategies Inc, noted that is not necessarily a fair comparison because, from April through June, there were large global production cuts, with many auto lines on lockdown. Nothard pointed out that, in August, global new vehicle sales had fallen by 17-23% from a year earlier, depending on the region.

Automakers have faced disrupted international supply chains and factories while rolling out electrification programs for new models of vehicles

Forecasting where the market will go from here continues to be very difficult, especially since, according to Jeff Schuster, president of Americas operation and global vehicle forecasts for LMC Automotive, global automotive output has moved in several different directions. He noted that auto production had actually rebounded quite nicely during the second half of last year with automakers starting to rebuild inventories and make up for lost volumes.

Nothard said that even that recovery was not as strong as it could have been, explaining, "It is clear from a manufacturing perspective that there were still constraints in place, including social distancing and the fact that not all auto plants had yet returned to full capacity." He said that because of that there were still significant reductions in production levels and efficiencies, which, even then, started to cause a delay in vehicle production.

Nevertheless, things were moving in the right direction and continued to do so early in 2021 before rampant supply chain issues began to affect the market. Wall pointed out that while the biggest challenge that the auto industry is facing right now is clearly the shortage of semiconductor microchips, it is also being hard hit by the tightness of several other components and such materials as steel, aluminium, rubber and foam.

Bertrand Rakoto, Ducker’s senior engagement manager, said that global auto production is about 12% lower than had been projected earlier this year and that it is not expected to match demand until 2023.

John Catterall, vice president of the American Iron and Steel Institute’s automotive program, said that it was initially believed that 2021 would be one of the best years that the auto industry had seen in a long time, but that changed with automakers shutting down many of their plants, he said, estimating that about 4 million units have already been lost globally, largely due to the chip shortage.

Nothard pointed out that one of the latest moves was by Toyota, which cut its global auto production by about 40% in September and is planning to slash it by 40% in October too. Also, General Motors announced in mid-September that it would further extend the length of time that seven of its North American plants will be idled.

Although many of the production cutbacks have been at plants making sedans, Mike Keown, chief executive officer of Commonwealth Rolled Products and chairman of the Aluminum Association’s Aluminum Transportation Group, said that pick-ups and sport utility vehicles (SUVs) are not immune.

Dealing with chip shortages

Rakoto said that while there have been shortages of materials and components in the past, none of those shortages hit the auto market this hard, and while the semiconductor industry expected a shortage by 2022, it was not expected to hit the auto industry, which only accounts for a small share of chip demand – about 12% according to Nothard, compared with the 33% share taken by the communications sector.

The Covid-19 pandemic accelerated the chip shortage timeline to 2020, with chip production lockdowns in Asia coming at the same time as information technology demand increased with so many people working from home, Rakoto said, noting that originally chip producers had planned to start adding production capacity starting in 2020 to be prepared for the expected pick-up in demand in 2022. But the construction of the planned new plants, which take about two years to ramp up their production, was delayed at the same time as the auto industry recovered more quickly than expected from the pandemic.

Also, as more chips become available, the majority will not necessarily go to automakers, Nothard said, but rather even more dominant sectors for chip demand, such as the communications industry.

While initially the most popular way to deal with the chip shortage was for automakers to produce incomplete vehicles and park them to await chips, JD Rutt, vice president of business development for Hydro North America, said that at present that strategy has been somewhat exhausted given that there is limitted space available to store vehicles and the logistics of doing retrofits when chips do become available is complicated.

While they are doing this, automakers are still consuming a lot of steel, aluminium and other raw materials and continuing to order more, Wall observed, explaining: "They are reluctant to turn the spigot off because they don’t want to have shortages in other areas as they get the ship righted for semiconductors."

Some of the automakers’ other strategies, Rakoto pointed out, have included using the chips that become available in the most profitable vehicles, such as large SUVs and pick-up trucks, or reducing the types of features offered to reduce the number of chips needed per vehicle.

The chip shortage and other supply chain issues are having the effect of pushing out the recovery of auto demand by about 18-24 months, Wall estimated, noting that while he expects to see some alleviation of supply chain pressures starting in mid- to late-2022, even then the industry will still be digging itself out of its difficulties. "However, once we get to the point where the supply chain challenges are sorted out, there will be a need to rebuild vehicle inventories." He said that while the biggest need for that will be in the United States, both Europe and China are seeing those pressures as well.

Changing the vehicle mix

At the same time as the auto industry is going through supply-chain challenges, the vehicle mix continues to be transformed, with the most profound change being the transition from the predominance of internal combustion engine (ICE) vehicles toward greater electrification – whether full battery electric vehicles (BEVs) or hybrids. But at the same time, especially in the US but also elsewhere, the light-truck share continues to grow.

"No other region is anywhere near North America – particularly the US – in its use of light trucks," Plummer said, noting that in July its share of auto output had been a dominant 78.6%, while in Europe, Japan, China and elsewhere in Asia the share is 15-35% of the total market.

Rakoto pointed out that it is hard to say just how much the vehicle mix has changed over the past year or so, given the supply-chain-related production distortions. For example, General Motors is not currently producing certain sedan models, and other automakers are also concentrating on light truck models, which tend to be higher margin products.

Also, the line between some light trucks – particularly crossover vehicles (CUVs) and minivans – and sedans tends to be somewhat blurry, Catterall pointed out, and much of the growth in light trucks has been in CUVs, which currently account for about 46% of US vehicle sales.

From the global perspective, however, the more dramatic change in the vehicle mix over the next several years will be the transformation toward more electric vehicles. While its share of the total auto market is still quite small, it is clearly growing rapidly.

Plummer said that, even in this very challenging market, global sales of electric vehicles (EVs), including BEVs, and plug-in and non-plug-in hybrids, are expected to nearly double this year to 5.7 million units from 3.1 million vehicles in 2020.

Schuster pointed out that even though the rate of growth this year could have been damped somewhat by the chip shortage, in line with the growing desire for a more sustainable auto market over the medium- to longer-term there will be a substantial global push for BEVs.

Rakoto agreed, stating that while BEVs currently only account for 2-3% of all autos produced globally, that share is expected to grow to the point that the market will be able to start to feel that change within the next four to five years, with further growth coming in stages.

Penalties on emissions

Already, Wall said, a lot more BEV models are being launched, particularly in Europe and China, as part of a 'carrot and stick’ approach, which includes some heavy penalties on emissions. He predicted that by 2025 the BEV share will move up to 21% in Europe, 20% in China and about 15% in North America, which has been lagging behind, but is likely to gain some momentum given the incentives that the administration of US President Joe Biden has recently been talking about.

He estimates that by the second wave, which is expected to occur by 2030, the North American share could rise to about 34% – which is a sizable increase, although below Biden’s goal of 40-50% and also less than China, at about 38%, and Europe, at closer to 50%.

It is governmental policies that, at least initially, have been pushing this vehicle electrification megatrend. For example, Jeffrey Osborne, managing director of sustainability and mobility technology at Cowen & Co, said that the fines associated with Europe’s 2020 CO2 rules accelerated the rate of BEV adoption there, with China’s new energy vehicle (NEV) policy having a similar effect.

Governmental targets to limit or ban new ICE vehicles have been pushing the automakers in their vehicle development efforts. Nothard said that many manufacturers are moving even quicker than the stated deadlines for electrification, which, on average, are from 2030-35 to closer to 2025, especially for higher end vehicles.

Keown said that consumer preference will be key. "Ultimately the consumer will rule the day," and it will be meeting their needs as far as form and functionality, including electric light truck options, that will allow EVs to continue to take market share from ICE vehicles.

Rutt agreed, saying that means giving consumers what they want in terms of product type, product attractiveness, price points, range, etc. That, Catterall said, includes the need to get BEV cost down to within striking distance of ICE vehicles and to upgrade the charging infrastructure – including the installation of fast public charging stations – to address range anxiety.

With these dynamics, there will continue to be a mixed material strategy in the auto market, Rutt said, with the automakers using the right materials in the right parts of the vehicles for the desired performance characteristics, with a lot of attention continuing to be on lightweight vehicles.

There are differing views on how this should be accomplished, with many seeing aluminium as a good choice of a lighter material, particularly to compensate for the heavy batteries in EVs. Keown said that aluminium is already the fastest growing automotive material and that volumes for that use are expected to grow by 10% or more by 2026.

Plummer said that even though steel content will be seeing a mild erosion in auto applications over the next 10-20 years in order to keep kerb weights down, there will be increased use of advanced high strength steels (AHSS) in structural components. Catterall said that while there has been a lot of growth in the use of aluminium closures, many vehicle architectures, including EV designs, are largely steel-sheet based. He said that while some start-up EV companies started off with aluminium, some have since switched to AHSS for the main structure of the vehicle.

Overall, 2021 has been a difficult year for auto companies and their suppliers to manage, forecast and regulate because of the chip shortage and other supply chain issues, but while many unknowns will continue to affect the auto market through early 2022, Rakoto believes that by the end of next year, or early in 2023, auto production levels should get closer in line with demand.

Despite all the challenges and disruptions, the automakers have remained largely resilient, proving that they were able to adapt, Schuster said, concluding: "All in all, the industry should be in a better position coming out of this because there are always lessons to be learned from chaos and difficult, challenging times."