Monitoring Update: Continued semiconductor shortages disrupt end-to-end automotive supply chains

Monitoring Update: Continued semiconductor shortages disrupt end-to-end automotive supply chains

This blog builds further on our blog post of July 2021. This blog post discussed the semiconductor shortage and its impact on the automotive sector. In this blog, we will provide an update on how this shortage has evolved. Furthermore, we will address how you can quantify the impact and outlook as an upstream supplier in an end-to-end automotive value chain. Let’s start with a short overview on how this shortage has started.

Drivers of the semiconductor shortages

Like most issues we are currently facing, the cause of the semiconductor shortage was the coronavirus. During the initial phases of the outbreak, there was a lot of uncertainty on the impact & duration of the resulting crisis. Most automotive companies we have contacted were expecting a long recession afterwards. However, demand for vehicles recovered much quicker than anticipated, which led to troubles restarting the global supply chains & fulfilling demand.  

During the outbreak, auto manufacturers canceled orders from their suppliers. This created a ripple effect in which those suppliers also canceled their own suppliers and so forth. Producers of semiconductor chips rebooked automotive production slots for goods that were more popular during the past 2 years: electronics. These parts were in higher demand due to increased consumer requirements (we all needed additional laptops, tablets & televisions during the work from home months), increased business requirements (cloud computing), and cryptocurrency popularity. On top of that, most of the semiconductor production capacity is located in Taiwan, South Korea, and Japan. Because of COVID flare-ups around the globe, shipping semiconductors from these nations is even more difficult. Lastly, a fire in a major semiconductor factory further worsened the situation.

The imbalance in automotive supply chains in Q2

In our previous blog in July 2021, we identified the imbalance between demand and supply. We discussed the below graph that depicted the increase in vehicle sales and the struggles in vehicle assemblies. Demand & supply behaved in an opposite direction, quickly depleting the available assembled vehicle inventories.

Figure 1: Indicator status July 2021 – Imbalance between vehicle sales & vehicle assemblies

At that moment, Q2 2021, the general expectation was that the worst was behind us. Slowly but steadily semiconductor & other shortages would get resolved and vehicle assemblies were expected to recover in Q3 & Q4.

Slower than expected recovery of vehicle assemblies

In our previous blog post, we provided monitoring tools to follow up on how this shortage has been impacting the industry. Let us give you an update on how these indicators have been behaving!

The dashboard below builds further on the monitoring we included in the previous blog. It visualizes three indicators which we use as proxies for the demand behavior in three parts of the end-to-end automotive value chain. It monitors the actual US vehicle sales to consumers, the number of cars being assembled at OEMs, and the number of automotive parts being produced further upstream. The indicators have been rescaled and plotted on one chart so we can zoom in on their converging or diverging behavior.

Figure 2: US vehicle sales to consumers, the number of cars being assembled at OEMs and the number of automotive parts being produced – rescaled and plotted

The graph shows that the indicators evolve similarly before the COVID outbreak and indicates that the end-to-end value chain was for the most part in sync. The overall trend of vehicle sales is reflected in the proxies of the upstream echelons.

After the outbreak, vehicle sales (blue) peaked at the start of 2021. This peak in demand reached a maximum in March 2021. It consecutively turned into a steep decrease for six months until September 2021. Car manufacturers have been unable to assemble sufficient cars to fulfill & sustain the available demand. The car assembly (green) situation showed initial signs of recovery in October & November. Whether this recovery will persist or not will become clear in the upcoming months!

Where in Q2 general expectations were that the worst was behind us, the reality has demonstrated that recovery has taken much longer than anticipated and is still ongoing. In Q4 automotive supply chains continued to be disrupted by semiconductor shortages. Several automotive producers have prolonged their Christmas break to lower their speed of assemblies to cope with the shortage.

Inventory imbalances & changing inventory policies

Inventory monitoring dashboards confirm the imbalances: inventories of assembled vehicles (green) are at an all-time low (40k finished autos, pre-COVID normal of 500k), whereas parts inventory (blue) has been climbing steadily over the past year. This is another indication that not enough cars are being finished. Additionally, the increase in parts volume could be an indication of a bull whip that could ripple through the automotive industry. Inventories of parts are being build with the expectation that the situation will normalize soon. If this normalization does not materialize, downstream manufacturers might choose to reduce their inventories over ordering new parts, which could leave upstream manufacturers with few orders.

Another dynamic at play is the changes in behavior of OEM’s & tier 1 suppliers. Several suppliers have significantly suffered and have stepped away from JIT inventory policies where inventories were minimal and often limited to WIP on in transit inventories. Several suppliers have decided to build up a safety stock to buffer against raw material shortages.

Figure 3: Inventory positions July 2021 – buildup of stock upstream & depleting downstream

Figure 4: Inventory positions November 2021 – upstream stock build has reached maximum & downstream stocks have reached all-time low

Low supply situation has impacted prices and lead times

The low amount of new cars entering the market is increasingly impacting consumers. Given the law of supply and demand, the low supply situation has led to significant price increases for cars. These price increases are not only seen in new cars, but also for the (limited) supply of used cars. Figure 5 shows the price of used cars has increased by 50% over the past year, this increase has been occurring at a pace never seen before.

Another side effect is the very long lead times when ordering a new car. Due to the limited supply and high demand, the lead times for several types of cars can be up to 1 year. These side effects can be easily monitored, and we suspect that once the shortages ease, these effects will start showing normalization.

Figure 5: Price of used cars has seen a dramatic increase over the past year

The outlook for the automotive value chain

How will the situation evolve? After the paltry growth the automotive sector saw in 2021 due to the shortage, the current expectation is that 2022 will show sizable growth around the globe as supply chains recover. The growth is mainly expected in the second half of the year after the semiconductor shortage is expected to decrease. Whether this growth will materialize depends on whether the shortage normalizes, whether other issues potentially arise (logistical issues, raw material costs, and issues, auto cost and financing,..) and if consumers continue to have an appetite to invest in new cars.

Quantify how your company is impacted & create an improved outlook

Monitoring the situation month-over-month is critical to keep a good insight into the evolutions across the different echelons. It’s wise to select the most relevant indicators for your position in the value chain. Monitoring tools from Solventure LIFe collect the different indicators from public and private sources in a convenient way.

Solventure LIFe also assesses how your company sales are correlated with different indicators and which indicators demonstrate a leading behavior on your sales. These insights allow companies to make a forecasting model that includes evolutions from macro-economic & industry indicators. Companies create a competitive advantage to drive the discussion as part of their DMR why the bottoms-up sales forecast aligns or deviates from a macro-economic forecast including these indicators. When inflection points in company sales occur, these models give early warning signals 4 to 6 months in advance. Which sales, marketing, or supply chain leader would not hugely benefit from 4 to 6 months of time to anticipate significant demand changes?