BMW April 2022

One of the markers of the Covid-19 pandemic was the scale of misleading information and indeed downright lies that were punted around by major individuals, companies and even governments. It has become very hard indeed to cut through the fog of ‘stories’ and click bait to understand objectively what is going on.

One thing we do know. Vehicle parts, if they are not in a warehouse, they are effectively usually unavailable. The issue has affected vehicle manufacturers, their suppliers and more. The big scale answer to all of this is of course the pandemic, which repeatedly shut down manufacturing as well as distribution. Add into this mix continued wars (Ukraine is simply the latest addition) with the attendant sanctions, and a U.S.-led financial system that for the second time in 14 years teeters on the brink of the abyss. All of the economies tied to the US face variations of the same fate. But how can this affect parts supply?

Shipping containers

There is the mother of all crisis in goods shipped around the world, ranging from sweet crude oil from Russia – the immense disaster that befell Kwa-Zulu Natal with the floods – to anything travelling by container. Here is the current scenario…

  1. The China economy has faltered due to self-imposed lockdowns.
  2. Global demand for goods is supposedly up, even though prevailing real-world inflation says not.
  3. Empty containers are piled up in the wrong place – like Rotterdam.
  4. China has a shortfall in empty containers to ship goods as it ramps up output.
  5. Thanks to the last bubble in 2016 caused by Hanjin – which went bust – there was a surplus of tonnage. This is cyclical.
  6. Suddenly, container vessels are in high demand. Vessels which were sold 15 years ago for $7 million have sold in the past two months for $70 million, as shipping contracts inflate by double digits per month – and multi-year contracts are being signed now at that super high shipping tariff.
  7. This adds an estimated 10 to 15% on-cost to goods carried.
  8. There is a strangulation of on-shore distribution especially in the ‘West’, meaning full containers are not moving out fast enough and empty containers are not being returned fast enough.

An interesting aspect of the last point – shipping profit margins have climbed from typically less than 10% to around 57% right now. Part of that is due to the price of container shipping increasing by tenfold in the past two years, and part is down to ramping charges. When a container is released from the port, the shipping company charges a small daily rental for the container as well as the trailer it’s sitting on. When the container is empty, it has to be booked on a specific time slot to re-enter the port. The ‘new’ practice is to delay the return not by days – but months, adding up to $30 000 per container.

This may occur in Europe or North America, but it affects the whole global distribution system. The shipping companies have been found out – but refuse to answer questions about why this is happening. Even the trucking companies, aware of the issues caused by driver shortages, are adding on-the-spot fees to move individual containers – or if the fees are not paid, the container waits and waits and waits for the next collection slot. This can add up to $12 000 per container in the US – for example.

Until the shipping companies get their act together, containers will continue to end up in the wrong place at the wrong time – adding time delays as well as increased shipping costs.

In addition, there is a deeply seated issue of resisting work mainly in the ‘West’, caused directly by government-imposed lockdowns and free ‘phantom’ printed cash, which is affecting docks along with much of greater society. Strike action is popping up all over Europe and the US, compounding the shipping delays. Short of a massive correction which may see some shipping companies collapse, the shipping cost scenario is not going to change for some years.

Environment, Social and Governance

Companies must make a profit which should generate a return for investors – the better these figures are, the more likely the business will attract investment to expand. However, that is now taken for granted. Instead, companies are now judged by their ‘Environment, Social and Governance’ – or – as financial types refer to this, ‘ESG’.

Former Canadian and British central banker Sir Mark Carney has led a small but powerful movement to promote ESG and coined the phrase ‘stranded asset’. In the financial world the ESG score is now more important that the ability of a company to make a profit. The upshot is any company operating in areas that are not approved by this cabal now struggle to attract investors. That is why oil companies for example, are moving into wind turbine and solar panel farms because their oil refineries are falling apart – and will carry on until they have to be closed down. Yet, a company like Tesla that has not repaid any of the huge debt it has amassed and made only a few quarters of ‘profit’, has no problem at all to attract investment via ESG.

Why should we be bothered? The European Parliament voted through impending legislation to reduce vehicle tail pipe carbon dioxide emissions – by the way, the first time it has included carbon dioxide in the emission protocol – to zero. That decision prevents whole life cycle CO2 reduction, by preventing the use of e-fuels (which have a reduced CO2 input during production compared to conventional oil refining processes) and so, the end of internal combustion engines in new vehicles from 2035 onwards. That is a massive, massive mistake. The EU does not care how much CO2 is emitted to make fuel as long as the end application does not have an exhaust pipe.

Why do his now? Well, the clue was revealed in international shipping news. The European carbon credit trading scheme was launched with much fuss around 2015, to coincide with the COP meeting in Paris. Since then, economics has allowed the market to become worthless – a ‘stranded asset’ as Sir Mark Carney would say. So, the politicians decided this was a perfect time to ramp up the whole subject of CO2 emissions, drag international shipping into the equation and so boost the EU carbon credit trading scheme. Quite simply, it’s a form of taxation for any vehicle that continues to emit CO2 after a made-up deadline.

Fear not, Germany has woken up at the 11th hour and objected

For the UK the Prime Minister announced a few days later that the UK would enable this mechanism by 2030, since we adopt the EU vehicle emission standards. As of the end of 2021, the UK has a total of 40.2 million registered vehicles (motorcycles, cars, trucks, buses, coaches) of which….

37 9221 are registered pure electric cars.

28 307 are registered pure electric vans (typically less than 7.5 tonnes GVW).

9 158 are registered pure electric motorbikes.

1 268 are registered pure electric buses and coaches.

520 are registered pure electric trucks (typically 7.5 tonnes GVW and above).

The proposal is to convert nearly 40 million vehicles to zero tail pipe emissions, based on inherently more expensive technology (pure electric vehicle typically sell at a 25-50% on-cost), inadequate support (the UK has no power generation strategy and wind power has proved to be rather unreliable) and a peak new vehicle sales rate of 2.5 million units per year – or dramatically reduce the vehicle population, with a massive impact on commerce as a direct result. All of this is based on ’science’, where 30% of key pollutants come from all road transport. There is nothing like the same effort addressed to the remaining 70% of pollutant sources.

Given new vehicles equipped with an internal combustion engine will be not sold in the UK from 2030 or in Europe from 2035, which are possible to build profitably and have a lower CO2 investment than a pure electric vehicle, one can see some holes in the ‘policy’. Oh dear.

Something has to give. The ESG cabal must be stopped. Perhaps Sir Mark Carney would like to retire for a third time?

A long wait for no parts

One thing is clear. South Africa is in a good position, because thanks to the far-sighted policies of Eskom the proposal to switch transport over to electric power is nothing short of fantasy. You may note a hint of sarcasm. Meanwhile, as Europe, the UK and the US commit commercial suicide, eventually something will give.

The upshot is a considerable population of elderly internal combustion engines which have suffered nominal or even almost zero maintenance will need attention. I see the same pattern for the entire automotive sector, as it doubles down to build new vehicles and struggles to supply the aftermarket with any parts. The pandemic and other events have simply amplified this situation.

Since the supplier base is destroying itself in Europe as the ill-informed political elite push highly questionable policies, how can the existing population of vehicles survive? Well in the first place the inflationary pressures will ensure many internal combustion engine powered vehicles will be in work for many, many years to come – this in spite of government engineered fuel price hikes (‘oh, look, we’ve got a tax income boost’). It’s one thing to pay double per litre of fuel, and quite another to fund up to 50% more than planned for a new vehicle which runs on a power source that may have to be ‘load shed’ from time to time.

When – not if – the rubber band powering this mass failure of policy snaps, North America and Europe will need all the skills which South Africa – and indeed, Africa – has in abundance. Get ready for massive commercial opportunities in about three years’ time….

By Andrew Marsh