How car shortages are putting the economy at risk

Unrest in the auto industry, a powerful engine of the global economy, threatens growth and wreaks havoc in businesses and communities that depend on auto companies for their money and jobs.

For every car or truck that does not roll off an assembly line in Detroit, Stuttgart or Shanghai, jobs are at risk. They could be miners digging steel ore in Finland, workers shaping tires in Thailand, or Volkswagen employees in Slovakia installing dashboards in sport utility vehicles. Their livelihoods are at the mercy of supply shortages and shipping blockages that are forcing factories to cut production.

The auto industry accounts for around 3% of global economic output, and in manufacturing countries like Germany, Mexico, Japan or South Korea, or states like Michigan, the percentage is much higher. A downturn in auto manufacturing can leave scars that take years to heal.

The shockwaves of the semiconductor crisis, which are forcing virtually all automakers to cut shifts or temporarily shut down assembly lines, could be strong enough to push some countries into recession. In Japan, home of Toyota and Nissan, parts shortages plunged exports 46% in September from a year earlier, a powerful demonstration of the auto industry’s importance to the economy.

“This is a very big drag on growth and jobs,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Paul Jacques is one of the people who can be most deeply touched. He works in Tecumseh, Ont., For a division of component supplier Magna International, which manufactures seats for a nearby Chrysler minivan plant.

Mr Jacques, 57, was on the assembly line when he learned that Stellantis, the parent company of Chrysler, was planning to cut a shift in Windsor due to shortages of semiconductors, essential computer chips cruise control systems, engine management and a host of other functions.

Mr. Jacques and his colleagues knew their jobs were also in danger. “The mood has become incredibly dark,” said Mr Jacques, whose two children also work at the seating factory.

Automakers have been able to ease some of the spur by raising prices, passing some of the pain on to car buyers. Ford and General Motors both reported sharp declines in summer sales and profits last week, but raised their profit guidance for the full year. Daimler, the car maker Mercedes-Benz, said on Friday that its net profit rose 20% in the third quarter, even though the company had sold 25% fewer vehicles. Higher sticker prices more than compensated.

The pain hits hard workers and anyone who needs an affordable car. Automakers allocate rare chips to high-end vehicles and the like that generate the most profit, resulting in long waits for cheaper vehicles. Used car prices are skyrocketing due to the lack of new cars.

Vehicles with high profit margins like Ford F-150 or Chevy Silverado pickup trucks “keep getting pumped,” said Ram Kidambi, partner at Detroit-based consulting firm Kearney. “But vehicles that have lower margins are impacted, and therefore the workforce there is impacted.”

The crisis began last year as the prices of key commodities like steel and copper began to climb, said Viren Popli, managing director of Mahindra Ag North America, a branch of the Indian automaker giant that manufactures tractors for the American market.

The uneven rebound in the world after the coronavirus pandemic meant distant links in the global supply chain were out of sync and unable to connect. In late summer, the United States began providing booster shots, while a devastating outbreak in Malaysia closed factories.

Mahindra quickly gobbled up its existing parts inventory and then had to wait for refills. But they were delayed in ports with hundreds of ships saved, and container costs dropped from $ 3,000 to $ 20,000.

At a tractor assembly plant in Bloomsburg, Pa., Mr. Popli said, “We have lost 25% of production for two consecutive months due to container flow issues” at the Port of Long Beach, Calif. .

It is difficult to calculate how much the problems of the auto industry will spread to the rest of the economy, but there is no doubt that the impact is huge as there are many other industries that depend on car manufacturers. Automakers are heavy consumers of steel and plastics, and they support extensive supplier networks as well as restaurants and grocery stores that feed autoworkers.

“If the Windsor plant doesn’t work, everyone feels the impact,” said David Cassidy, president of Unifor Local 444, which represents the workers who build Chrysler minivans there.

Auto factories – like the Stellantis plant in Ontario – are often the largest private sector employers in their communities, making the shutdowns all the more devastating. Because auto factories tend to dominate the local economy, they are difficult to replace. Unemployment caused by auto factory closures persists for years, according to a 2019 study by the International Monetary Fund.

In Eisenach, Germany, a city of 42,000 people, Opel is building a compact SUV called Grandland. But Stellantis, which also owns Opel, closed the plant in October and does not plan to restart production until next year. Workers fear the closure will be permanent; Stellantis also produces the Grandland in a factory in France which continues to operate.

The approximately 2,000 people who work at the Eisenach plant or at adjacent suppliers are on paid leave. But Katja Wolf, the mayor of Eisenach, who joined a workers’ protest outside the factory on Friday, said people were reluctant to spend because they don’t know when the factory will reopen. It hurts local businesses.

“The biggest problem is the uncertainty about the future, when the auto industry is already in upheaval,” Ms. Wolf said in an interview. “People don’t buy new cars or book expensive vacations. They are too worried.

Opel plans to maintain all its German factories, including that of Eisenach, Uwe Hochgeschurtz, Opel chief executive, told the Frankfurter Allgemeine Zeitung on Sunday.

Semiconductors aren’t the only components in short supply. Automakers are also researching the type of plastic used to contain wiper fluid and mold the dashboard as well as the foam used to build the seats, said Dan Hearsch, general manager of the consulting firm’s Detroit office. global AlixPartners.

Because there is a shortage of a small holder used in SUVs, Hearsch said, the time it takes to repair a vehicle damaged in an accident has dropped from 12 days to almost 20 days.

AlixPartners estimates that the shortages mean 7.7 million fewer vehicles will be produced this year, and cost the auto industry $ 210 billion in lost revenue.

A relatively small number of countries account for the bulk of global production of automobiles and auto parts. They include the United States and China, as well as smaller countries like Thailand.

Slovakia, with just 5.4 million inhabitants, is home to large Volkswagen, Peugeot and Kia factories and produces one million cars a year – more per capita than any other country. Industry accounts for more than a third of Slovakian exports.

The longer the shortages of parts and materials persist, the greater the economic impact. Modern economies need vehicles to function. Trucks, essential for the transport of goods, are rare today, a brake on growth.

“We’re pretty much sold out in Western Europe and North America until next year,” said Martin Daum, head of Daimler’s truck unit, citing the chip shortage.

There is no sign that the crisis will end soon. Semiconductor makers have promised to increase supply, but building new factories takes years, and automakers aren’t necessarily the biggest customers behind tech giants.

“Semiconductor makers are going to prioritize the world’s apples and HPs,” Wharton School professor Gad Allon said, “not a Ford.”