BMW April 2022

Manufacturing a vehicle takes thousands of components, each of which requires model-specific – even body-shape-specific – jigs as well as tooling. This costs a fortune and is the reason the automotive industry, especially for cars and LCVs, represents a great deal of money invested (typically up to three years ahead of a single vehicle being made for sale). 

To manage these costs, vehicle manufacturers employ a series of suppliers – the first level who supply are tier one, the suppliers to the supplier are tier two, and so on. These suppliers agree to contracts model range by model range in which they can agree amortising tooling costs as well as just-in-time (JIT) delivery to reduce cash tied up in parts. There is a charge for JIT, but it also optimises the main assembly plant by storing no more than a few hours’ worth of parts at any time.

Fire in the hole

In 2011, the Renesas Electronics Corporation plant in Japan was hit by an earthquake, with the result that nearly 30% of the global supply of certain types of automotive control module semiconductors became unavailable. In a matter of days, the supply network (which was driven by JIT) started to show shortages. In a few weeks, most vehicle manufacturers had worked with other semiconductor suppliers to expand existing manufacturing facilities, so production line stoppages – along with aftermarket supply disruption – were minimised.

This was a vehicle manufacturer warning:

Too many conventional semiconductor designs were altered to make them specific to a vehicle manufacturer.

Over-reliance on key manufacturing sources, which meant some production locations served a significant proportion of the global automotive industry.

A revision to vehicle manufacturer design and purchase strategy was required. Formal reviews from around the world were published, press conferences held, “lessons must be learned” stated and yet, little changed.

In 2021 there was not one but three factors in play:

Many vehicle manufacturer plants were idled during the various lockdowns.

An unusual weather event in Texas tested an inadequate electric power supply system, leading to switching off key semiconductor plants for several weeks.

A fire in a Renesas Electronics Corporation plant eliminated production for the type of semi-conductor used in the automotive industry. Production of advanced semiconductors used for phones, through to laptops, made at the same plant were not affected.

The type of semiconductor typically used in the automotive sector is also used for everything from fridge freezers to computers. The various lockdowns pushed up demand for consumer electronics, so that the existing manufacturing capacity was already at full stretch before these events unfolded.

Time to wake up

Towards the end of the first lockdown vehicle manufacturers restarted production, because they knew full well what was coming. This started with assembling from stock already at the plants, with orders for fresh parts placed on a JIT basis. Some of the suppliers had gone out of business, but usually a vehicle manufacturer will own the tooling – they are not stupid.

However, the semiconductor market was not what the vehicle manufacturers expected. The big consumer electronics companies had banked stock as soon as the apparent demand started to increase beyond plan so that as supply became restricted, they had parts. In addition, most consumer electronics companies had stayed open for longer than the vehicle manufacturers, so had placed orders in good time for parts. 

When the vehicle manufacturer purchase organisations woke up, it was too late. Available capacity had been bought out, and their orders would join the queue. The result is rolling extended shutdowns at manufacturing plants right across the world. Some vehicle manufacturers are building vehicles minus the electronic modules they can’t get, which raised a known warranty related reliability issue – a vehicle which sits in the supply route to the customer for more than two months will have steadily increasing electronic issues. Furthermore, retro fitting parts compounds this quality issue.

Underlying trend

While the vehicle manufacturers put out “rah-rah” PR about record sales, what they are doing is closer to the dark days of 2007-08. Investment costs per model line have continued to spiral upwards, return on investment stubbornly refuses to go above 4%, and all that “free” Covid cash is going to be repaid sooner rather than later. Hence Daimler announcing 18 800 workers in Europe will be on short-time in the next few months, Ford of Europe taking the Cologne plant offline for three months (including summer shut down), JLR writing off £1.5 billion investment after initiating it less than a year ago, and Renault pushing out multiple press releases based on almost nothing, as well as others. 

On top of the Covid-19 related events, the shortage of semiconductors that will extend into 2022 and burgeoning operational debt comes another factor: political noise. Namely the push to internal combustion engine free mass transportation. Carlos Tavares, the CEO  of Stellantis, has stated his concerns for the automotive industry, namely the reduction of its customer base through 50% to 100% like-for-like vehicle cost based on political whim. For the body shop sector, the next 12 months is going to be very interesting. Repairing old, or new vehicles, it’s win-win.

By Andrew Marsh