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Automotive Outlook

Getting Unstuck

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MCN Editor Dan Markham While consumers are primed to buy, the North American automotive sector’s hopes hinge on a resolution of the supply chain woes that limited production in 2021. 

In the spring of 2020, North American automakers put an immediate halt on assembly in response to the arrival of the COVID-19 pandemic. Virus fears have largely abated, absent the occasional variant spike, but the industry has yet to emerge from the deep freeze. 

Alas, the coronavirus plays only a tangential role in the struggles of the automotive sector. The American consumer has been ready and able to make an upgrade in its garage since the start of 2021, but the automakers haven’t been able to fulfill their demands. And, sadly, that condition will remain in place for at least part, and possibly all, of 2022. 

The culprit is the inability of the automakers to procure all of the components that go into a modern vehicle, most notably the semiconductors required to perform hundreds, if not thousands, of functions. It’s worth noting that semiconductors are merely the most prominent and obvious item in shortage, but not the only one plaguing the automotive community. Empty shelves abound, a victim of transportation woes, isolated COVID-related shutdowns and the other factors making a mess of the global economy. 

“It’s all supply chain,” said Mike Wall, director of automotive analysis for IHS Markit during a presentation to the Precision Metalformers Association’s West Michigan District. “It doesn’t have to be semiconductors. It’s wire harnesses and the like.”

But it’s the semiconductor shortage that’s gotten the most attention, and for good reason. The chips are instrumental to the operation of today’s car and truck. 

The shortage is the result of numerous factors, including the pandemic. When activity shut down around the globe in 2020, millions of workers shifted to home work, requiring additional demand for personal computers. And in the semiconductor space, consumer electronics is the 300-pound gorilla, while auto accounts for only 10 percent of the market. 

“The automakers generally enjoy a very powerful position when it relates to their suppliers. But not when you get to semiconductors,” Wall explained. “When the automakers say, ‘Jump,’ the semiconductor guy says, ‘You jump. I’ve got Samsung on the line.’”

On top of that, auto manufacturing has been dramatically ramping up its use of the chips in all aspects of assembly, which is why the industry had no problem with supply at 90 million global units but couldn’t meet demand at 75 million just a few years later. From 2017 to 2021, the number of chips in automobiles almost doubled. 

What’s interesting is the industry wasn’t quite caught flat-footed. Carmakers recognized the upcoming chip shortage several years ago, and were working with chip developers to expand capacity. Then COVID hit, and all of the plans were scuttled, said Abey Abraham at the S&P Platts Aluminum Conference. “The investments were unable to be put in place,” said Abraham, managing director of Ducker Worldwide, an automotive analysis firm. 

Now, those investments are being made, including efforts by the leading automakers to partner with microchip technology companies. But such endeavors require a lengthy incubation period, meaning any of the investments announced in the wake of the crisis won’t be producing at capacity until next year at the earliest. 

Thus, supply chain constraints will continue to inhibit the global automotive industry. 

“You will see some growth this year, but when we get to 2023 that’s when we get back to pre-COVID numbers,” Wall said. 

In 2019, the last full year before the pandemic, 16.3 million light vehicles were produced in North America, down from the prior four years where production exceeded 17 million units annually. In 2020, sparked by the shutdown of assembly plants in response to the outbreak, the continent only made 13 million vehicles, a number it repeated despite higher demand last year. 

Looking at 2022, IHS Markit predicts North America will make 15.2 million vehicles this year, then finally return to pre-pandemic totals with 17.2 million units in 2023. U.S. 

production is expected to increase from 8.9 million units in 2020 to 10.4 million this year, with Mexican production increasing from 3 million to 3.4 million and Canadian manufacturing climbing from 1.1 to 1.4 million.
 
Should the supply chain issues abate and the automakers can beef up production more aggressively, the pent-up demand will provide a ready market for their vehicles. Though, the longer it takes, the less it can be counted on to provide a boost for the industry. 

“Pent-up demand is a real thing, but when we look over prior cycles, the longer you have it pent up, it becomes vulnerable to destruction,” Wall said, citing changes in a person’s balance sheet as one of the factors that can drop someone from the demand picture. 

Another outlet, however, is somewhat blocked. Consumers in need of a vehicle can typically turn to the used market for satiation, but that is less of an option now. The used car segment was bled dry in 2020 in the absence of new vehicle production, leaving the market with just bottom-of-the-barrel offerings. Likewise, lease returns were put on hold, again removing a source of previously owned cars. 

“There is still a very robust pool of demand out there if we can get the product out,” Wall said. 

The Shift is On
The supply saga is taking place while the North American market is undergoing a seismic change in production models, one of the biggest in history. After years of teasing the possibility without much in the way of activity, the push to electric vehicles is finally getting started in earnest. 

All of the North American carmakers are launching new battery electric vehicles and plug-in hybrids, only partly in response to federal requirements. 

In 2020, there were 22 battery electric vehicles produced in North America. At the end of this year, the number will have grown to 63, with that total doubling again by 2024. By 2030, the number of BEV nameplates is projected to grow to 253 vehicles, including 73 cars, 165 utility vehicles and 15 pickups. 

The future is here when it comes to electric vehicles. “This is a phenomenon that’s happening globally. It’s not just something people are talking about; it’s actually starting to happen,” said John Catterall, vice president of the automotive program for the American Iron and Steel Institute at the FMA Annual Meeting in March. 

The automakers themselves are confirming that. 

“We recognize that we need to launch more EVs faster,” GM Chairman and CEO Mary Barra said at the company’s year-end conference call. “The Chevrolet Silverado EV launches next spring and the Chevrolet Equinox and Blazer EVs will also reach the market in 2023. We have teams working to accelerate the volume curves for all these launches and to resume both EV and EUV production as soon as possible.”

EV talk also dominated Ford’s address to investors. “In the past six months, we doubled our 2023 planned capacity for EVs to 600,000 units a year. Our team knows how to scale manufacturing, and now we’re harnessing that capability to ramp up production of EVs,” said Ford President and CEO Jim Farley.

The push comes while there are hurdles still to be cleared. The existing network of charging stations is not sufficient to handle any kind of surge in BEV usage, though the infrastructure bill does set aside $7.5 billion to improve the grid. 

Perhaps more pressing is the affordability of the vehicles, even with government incentives that exist and could become more encompassing and permanent. “My fear is these will be so expensive that the average person won’t be able to get into an electric vehicle for quite some time,” Catterall said. 

One development that will test the automotive supply chain is how the new BEV nameplates being added are not coming at the full expense of ICE models. The industry, at least in the near term, is looking at a record number of models on the market.
 
Since there won’t be a corresponding spike in production or sales, each nameplate will represent a smaller volume of vehicles than in the past. “We have a lot of product chasing customers as far as nameplate count,” Wall said. “We’re not getting rid of nearly as many ICE nameplates as we might think, so it’s going to take time to grow into the higher unit per nameplate.”

That combination is stretching the development departments thin at the automakers, a situation exacerbated by the labor shortage. “This has led to a problem for the OEMs. They have to maintain two types of vehicles, ICE and BEV,” he said. 

Their response has been to focus most of their internal work on the electrification side of the equation, while turning over ongoing development of the traditional ICE vehicle to the Tier 1 and Tier 2 suppliers. 

Interestingly, the quick move toward electrification has pushed the previous new developments into the background. 

For the better part of the previous decade, lightweighting was the focal point for the OEMs, which paved the way for greater inroads by aluminum as well as successful R&D efforts by carbon producers to make stronger and stronger steels.

However, while lightweighting isn’t entirely irrelevant to the BEV, it’s much less meaningful when it comes to getting the necessary improvements than in the internal combustion engine vehicle. 

“Mass is important when it comes to range, but less important when it comes to the overall efficiency of the vehicle,” said Catterall.  

Autonomous vehicles, once the primary subject of the evolution in automotive, have lost steam, even if design work continues to take place behind the scenes. 

“I think eventually we will get to fully autonomous vehicles, but even experts are hedging on it in every situation,” said Catterall. “We might get to geofenced situations, or it might be OK on freeways.” 

Instead of fully autonomous, the more likely move is toward greater driver assistance, with things like automatic braking and collision prevention becoming standard features on all new vehicles. 

View from the Suppliers
While 2021 was a wild ride for the automotive industry, Mike Speer, director of sales and marketing of Horizon Steel, Shelby Township, Pa., expects 2022 to be “a different kind of crazy than last year. A lot of it is going to be managing risk this year. That’s a big thing.”

Suppliers such as Horizon Steel that had material in 2021 could sell it at about any price, he said. But prices and availability of hot-rolled dropped considerably to start the year, though mills began to push back on that at the start of March. 

“Last year we had historically high prices on hot-rolled products. We’re still lingering with high value-added premiums on cold-rolled and coated,” says Tony Kafato, president of Venture Steel, Etobicoke, Ontario, whose company expanded its presence in the automotive sector last year with the acquisition of Olympic Steel’s Detroit operations. 

Managing through the price decline is a challenge for service centers. “Since the beginning of the year, I didn’t put any extra orders in because I knew the market was turning,” Speer says.  Of course, they still have higher-dollar orders to get through, selling to a customer base that is eager to recoup from last year’s astronomical pricing. 

Pricing is just one concern. While the service centers are being advised to be ready for an uptick in orders, the shortages of components continue to cloud the market with uncertainty. “The catch up in build schedules we’ve all been waiting for and told to be ready for hasn’t really materialized because of a number of factors outside of everybody’s control,” Kafato says. 

The suppliers saw some pushouts from the OEMs in the first quarter, but they remain relatively optimistic about the outlook for this year. 

“We’re hearing, ‘You have to be ready. The chip shortage is going to abate. The issues are going to abate.’ And when it does, we’ve got a heck of a rebuild to do and a heck of a restocking to take place,” Kafato says. 

Caption:
Automakers such as Stellantis hope 2022 pulls the industry out of a two-year rut. 
(Photo courtesy Stellantis)