Overview of the Automotive Supply Chain and Its Future
Globalization has been a wild wave of progress and development that nations and peoples around the world have been riding for many years. Most of us have long been convinced of its superlative benefits for not only our home economies but for those of developing countries, too.
Everyday objects being made in countries like China, Indonesia and Vietnam boosted those countries’ economies but also ensured that goods in our own backyard were affordable and plentiful. So much production has been outsourced to other countries that we now have built up a truly global supply chain in a number of key industries. One of these is the automotive industry.
But how have recent events impacted the global automotive supply chain? What about the future? Will it be business as usual once the COVID-19 pandemic is fully over? These are topics we are exploring in today’s blog.
Background: Pre-Pandemic Automotive Supply Chain
In February 2020, Statista revealed some interesting facts about the global automotive part supply chain and how it had been impacted by the outbreak of COVID-19, especially in the city of Wuhan, China’s largest automotive production center.
They showed that before the pandemic in 2018, the United States car industry was the most dependent on Chinese parts, importing a huge $11.7 billion of China’s total export volume of $34.8 billion. American reliance on Chinese imports dwarfed that of the next most reliant, Japan, which imported $3.2 billion in Chinese-made parts in 2018.
The picture we see is of an automotive supply chain that was heavily dependent on conditions in the world’s second-largest economy, China. The outbreak of the pandemic in early 2020 hit Wuhan hardest of all within China, which obviously had a huge knock-on effect. The biggest impact of all has arguably been the shortage of semiconductor chips, but that still only makes up a small part of the supply chain story.
COVID-19 and the Global Automotive Supply Chain
The pandemic had three almost immediate and severe impacts on the automotive supply chain:
- Plants across the world had to stop or slow production because of the shortage of parts coming out of China.
- Factory shutdowns in the early pandemic stages, and then a sudden lasting resurgence in demand for new cars began the most serious semiconductor chip shortage that the world has ever known.
- Demand for foreign cars in China plummeted by 80 percent in the first months of the pandemic as the country locked down hard.
Exposing the Chain’s Weakness
A fourth and arguably more significant impact of the pandemic has been the exposing of the weakness of the globalized supply chain. That outsourcing and internationalization of production that had been so strongly championed by so many had its greatest weakness exposed — even when “globalized,” we are still dependent on too few stakeholders, namely China.
It has reminded people that when we globalize and outsource, we are also putting the viability of the supply chain in an environment over which we have little to no control. There’s nothing to stop domestic events in a country like China from overwhelming a supply chain upon which a country like the US completely depends. This is what the pandemic has revealed to the world, and it’s forcing countries to rethink.
“Made in the USA” – Is It the Alternative?
There have now been many calls to avoid this situation in the future by ensuring that sufficient quantities of critical parts are made — or can be made — domestically. Producing key components in the US would certainly reduce risk, and as operating the global supply chain starts to become more expensive, returning to domestic production could actually work out cheaper if additional steps are taken such as employing greater automation.
The fact is that countries like China are becoming wealthier, and standards of living are on the rise. With that also comes naturally a greater expense of doing business. It’s increasingly less true that it’s cheaper to produce something in China and ship it to the US than it would be to produce the same part domestically and ship it via land or air freight to car plants.
So, what will happen next? Whether the global chain is rebuilt, or a domestic chain is developed to replace it, there are many significant challenges facing the automotive supply chain before any of it can happen.
Most Significant Challenges Facing the Automotive Supply Chain
Different companies and individuals have varying ideas on what will happen with the automotive supply chain in the longer term. Before anything can be realized in the long-term, however, there first needs to be victory over a number of industry challenges.
1. The Semiconductor Shortage
The ongoing shortage of semiconductor chips is arguably the most biting and pressing issue that has been dragging down the supply chain since the pandemic began. Where decades ago cars wouldn’t have been impacted as much by such a shortage, the sophisticated and digitized nature of modern cars — especially electric cars — has changed all of that.
Much of the world depends on a handful of suppliers of these semiconductors located in mainland China, Taiwan, and Japan. When the pandemic began, many semiconductor production facilities shut down and automakers were canceling their orders left, right, and center as they anticipated sales would go off a cliff for the foreseeable future. Little did they know that automotive demand would surge back up much sooner than expected, forcing the same automakers to re-order in order to meet production demand.
As the world’s semiconductor plants attempted to restore capacity, further disaster struck as one of the biggest players, Japanese manufacturer Renesas, had a serious factory fire that knocked out several production lines for weeks. The shortage rumbled on and on, and even now in mid-2021 companies like Daimler are thinking that this shortage is going to drag on into 2022.
It turns out that manufacturing semiconductors is a very specialized and precise process and it’s not just a case of flicking the machines back to “On” and regaining full capacity. It takes time to build up each production line. Until an end to the semiconductor, the shortage can be found, it’ll be very hard for any automaker to picture what to do next.
2. Natural Rubber Shortage
As if the semiconductor shortage wasn’t bad enough, there’s a further critical shortage in the works in the form of a natural rubber shortage. While it hasn’t fully begun yet, it is the latest in a long line of supply problems that the automotive industry is now anticipating and dreading.
Most of the world’s rubber trees are grown in Southeast Asian countries like Thailand and Indonesia. The automotive world obviously has a huge need for natural rubber and its properties for the production of tires and other key parts. Prices for rubber have been on the rise due to supplies being cut after various natural disasters such as serious flooding and even leaf disease. Older problems in the industry have disincentivized producers from planting new trees to boost supply because rubber trees take 7 years to mature and there was no great outlook to inspire more production.
The US automotive industry has now been left behind as competitors in China bought up huge amounts of products as their economy opened up after overcoming the worst of the pandemic in mid-2020. Now that the US economy is trying to relaunch, they find themselves lacking in rubber supply.
We are yet to reach the point where car makers openly come out and say that there is a shortage, but it’s clear that the combination of struggling production and limited supply, huge purchases made by the largest user of natural rubber, China, and the long-held practice of minimizing stored inventory to control costs has created “the perfect storm” in rubber supply.
3. Looming Shadow of Future External Factors
Another big challenge facing the supply chain will be how to better prepare for the potentially devastating effect of out-of-control external factors. For the automotive industry, production problems in China caused by the pandemic was the first disruption, and then production problems at home caused by the pandemic with a workforce either out sick with COVID-19 or at home afraid to catch COVID and thus not coming to work. All of this was just what happened in 2020 and early 2021, but what about the future?
It wouldn’t have to be a pandemic. Wherever US carmakers decide to focus their outsourcing, there is always the looming risk of internal conflicts, civil unrest, catastrophic weather, natural disasters, political and economic turmoil, and much more. How then can the automotive industry overcome these elusive specters?
The pandemic is just one example. Another interesting example is the increasing momentum being created by world governments over the future of gasoline and diesel cars. In the UK, for example, they had first planned to cease the sale of all new gasoline and diesel cars, including hybrids in 2040. Boris Johnson, after ousting party colleague Theresa May to become the new Prime Minister and winning an election in 2019, suddenly decided to bring that deadline forward to 2030 for gasoline and diesel cars and 2035 for hybrids.
Such shifts in policy have as big an impact on supply chains and industry development as an earthquake, mudslide or tsunami. Imagine planning your next 20 years of growth and product development, only to be then told you now have to throw most of that out and focus on a completely different direction. Mitigating these risks and planning contingencies for such external factors is a huge and urgent requirement for the auto industry now.
4. Costs and Complexities of Building a Domestic Supply Chain
It’s all very well and good for people to say that we should produce all car parts domestically, but even in a country as rich, powerful, and developed as the United States, that presents many serious problems. The fact is that many people don’t realize just how much time, money and development has already been invested in developing these outsourced production capabilities in places like China.
It isn’t the case that companies like Ford and GM one day just decided, “we need cheaper parts, let’s call China and get them.” There had to be a great investment in machinery, tooling, training of local staff and more. It has been a monumental effort for China to become the workshop of the world. It didn’t happen by magic.
To recreate this in the US will require an entirely new approach. Outsourcing to China meant designing a system that worked within a country of 1.4 billion people and therefore a massive (and poor) human workforce. Developing those production lines domestically in the US would have to be done with different equipment, robotics, and automation techniques because there just isn’t the local workforce to produce all the parts required.
There’s a stigma about factory work and similar “blue-collar” jobs in the US. They are seen either as the wheelhouse of immigrant labor or the uneducated American working classes. The only answer to that would be automation, but just as Rome wasn’t built in a day in China, neither would it be domestically here in the US.
Conclusion: The Automotive Supply Chain Will Have to Change, But How?
There can be no doubt at all that change has to come to the automotive supply chain. Blips and minor disruptions in the past were always shrugged off as part and parcel of doing any kind of manufacturing business. But the impact on global supply caused by catastrophic events like the global COVID-19 pandemic has been completely different.
There is a great appetite among the public for manufacturing, in general, to return to the shores of the US and those who have long advocated for such outcomes feel vindicated by the impacts of COVID-19 and the resulting semiconductor shortage, and even the looming rubber shortage. There will always be things that American carmakers need to import, but reducing dependence appears to be the wave of the future, not just in people’s hearts and minds, but in the colder, more business-like hearts of corporate boardrooms, too.
The question, then, is how exactly will it change? Rubber production can’t just be transplanted in the US, but there’s no apparent reason why the parts manufactured and assembled in cities like Wuhan couldn’t be done domestically in the US with the help of automation and other new production technologies. It could even prove to be something of a renaissance for the American car industry and downtrodden cities like Detroit. It all remains to be seen, however, as there are many other challenges to overcome first.