Bottlenecks and Uncertainty Amid the Pivot to Electric Vehicle Production: Highlights from the 2022 Automotive Insights Symposium
The 28th annual Automotive Insights Symposium was held on January 12, 2022. This year’s program focused on continuing issues surrounding supply chain disruptions, developments in capital markets, and the impact of new and proposed federal policies. A common theme throughout the program was the significant uncertainty the industry faces in meeting existing market demand while charting a path to a future that will be dominated by electric vehicles.
Charlie Chesbrough, Cox Automotive, provided an economic and industry forecast to start the program. Cox forecasts 16.0 million new light vehicle sales for 2022. That forecast is based on inventory rebounding strongly in the second half of the year. As of December 2021, new light vehicle inventory was 1.8 million units below December 2020 levels and 2.5 million units below December 2019 levels. Chesbrough noted that one risk to the forecast is the continuation of supply-chain disruptions that hinder a rebound in inventory levels. Another risk to the forecast is affordability, especially if lending rates rise in an existing inflationary environment. According to Chesbrough, in 2021, an 8% increase in new vehicle prices and consumers’ ongoing preference for larger vehicles helped lead to 30% of new light vehicle sales being comprised of vehicles priced over $50,000. Chesbrough said he believes that new vehicle prices may be reaching their upper limit, especially if lending rates rise, forcing monthly payments to follow suit. Dealers were selling vehicles above the manufacturers’ suggested retail price (MSRP) in the second half of 2021, with incentives as a percentage of final transaction prices falling below 4% by the end of the year. He argued that pressure on used vehicle prices, already high with prices 25% higher than a year ago for much of the second half of 2021, will continue to rise until newer vehicle inventory becomes available. However, even though 2021 new light vehicle sales were 2 million units lower than in 2019, total industry revenue was greater this past year because of the rise in new light vehicle prices, he said. Lastly, while Chesbrough said he expects dealers to build up on-site inventory as it becomes available, he anticipated some consumer purchases would shift to ordering vehicles that will be delivered at a later date.
Mike Jackson, Original Equipment Suppliers Association (OESA), kicked off a panel on supply chain issues highlighted by OESA’s fourth-quarter 2021 Supplier Barometer survey. Respondents reported a significant spike in pessimism relative to the previous quarter for the 12-month outlook, driven by disruptions in the pace of the recovery because of continued pandemic-related challenges. While both small and large suppliers reported increased pessimism, Jackson said, large suppliers were the most pessimistic. Jackson attributed this to Tier 1 suppliers (those that directly supply manufacturers) being squeezed by needing to pay significantly higher input prices in order to maintain production, while often not seeing any cost relief from their automobile assembly customers.
Jackson noted that the top threats to suppliers include production disruptions due to supply chain shortages, labor availability challenges, and inability to fulfill customer volumes. Especially problematic is when orders are cancelled late after suppliers have worked diligently to procure raw materials and secure the labor necessary to complete the order, he said. Another theme was management challenges related to the uncertain path of the pandemic, including labor shortages and inconsistent order volumes. For the first time since 2009, actual vehicle production in 2020 and 2021 fell short of the estimated breakeven production level needed for suppliers to achieve profitability, Jackson said. In addition, he cautioned that the attempt by suppliers to recover lost profits from the past two years may be affected by increased investment in electric vehicle programs. However, Jackson concluded that suppliers are optimistic about a return to higher production volumes that will exceed breakeven levels and be more predictable in the second half of 2022 and 2023.Bill Cook, William A. Cook Supply Chain Consulting, provided an original equipment (OE1) firm perspective from his experience working at Daimler Chrysler and Fiat Chrysler. The process of getting parts to an auto assembler has always been complex, but Cook characterized the 2020 supply chain as completely broken. From logistics to parts to raw materials, frequent disruptions were the norm, he said. For example, micro-chip shortages led producers to shift production to high-margin vehicles as overall production fell to maximize profitability, he added. Cook said he believes production levels are rebounding but labor shortages across all aspects of the supply chain are crimping some of this recovery.
Transportation congestion is yet another challenge, driven in part by a shortage of truck drivers. Cook said he was anticipating higher transportation costs as current contracts expire and transportation and logistics operators push through price increases. He concluded that in response to uncertainty, there will be an attempt to build up an inventory cushion, but it remains to be seen whether conditions will allow this to happen. Cook said he also believes that the pandemic-prompted trend of consumers ordering vehicles and waiting for final delivery will become more common over time, because it provides a more stable, profitable production environment.
David Fischer Jr. from Lithia Motors, a large automotive retailer, provided a perspective on supply chain impacts on auto dealers. A key challenge has been managing customer expectations in light of shortages of available vehicles and delays in receiving parts for vehicle repairs. A specific example offered by Fischer was backlogs related to body shop operations. Delays in parts, ranging from electronics to body parts, have led to a tripling in the value of work in process. For some brands, parts delays range from three to six months. Fischer estimated that supply chain issues will persist through the first half of 2022.Finally, Fischer said that dealers have seen improvements in margins through higher prices and fewer customer incentive promotions. However, a potential challenge for the industry will be affordability, he added. Customers are driven by monthly payment costs, he said, and the combination of higher product costs and potentially higher borrowing costs may squeeze customers out of the market. In 2019, the average cost of used cars on Fischer’s lots was $18,000; this had increased to $29,000 by January 2022. Still, while prices have been increasing, and financing costs could potentially increase as well, consumers can benefit from relatively higher trade-in values, given the unprecedented appreciation on leased and used vehicles. Fischer concluded by identifying an additional challenge dealers face in the current environment: attracting and retaining labor, particularly auto technicians.
John Casesa, Guggenheim Partners, started the second panel that examined the auto industry’s ongoing pivot toward electric vehicle production. Specifically, Casesa discussed developments in capital markets related to the auto industry’s shift to electric and autonomous vehicle production. He said that the technological revolution in the auto industry, which is just beginning, will have profound implications for the industry’s structure. He explained that the progression of a technological revolution in an industry comprises four stages: an irruption phase, a frenzy phase, a synergy phase, and a maturity phase. Each of these phases attracts different levels of capital investment that will shape the industry’s evolution. Casesa suggested that the traditional internal combustion engine (ICE) auto industry is in the maturity phase, with its markets and technology largely defined. For these mature firms, their capital strategies revolve around restructuring or exiting the market, repositioning their business for reinvestment and/or consolidation. In contrast, electric vehicles are entering the frenzy phase, he said, with rapid technological advancement and capital deployment. Capital is now flowing from incumbent firms to firms with emerging technologies. New capital being raised through instruments such as special purpose acquisition companies (SPACs) is going to emerging companies, not mature firms, Casesa said. He added that Tesla now has a market capitalization of over a trillion dollars, which will allow them to build plants and capacity at a rapid rate and in doing so, change the business model for the industry.
In addition to changes to the capital structure for the industry, emerging federal policies are expected to influence industry investments. Following Casesa’s remarks, Kristin Dziczek, Center for Automotive Research, discussed current policy developments in greenhouse gas emissions regulations, infrastructure spending, producer and consumer electric vehicle incentives, trade policy, and the prospects for a more comprehensive U.S. industrial policy.
Dziczek noted the Environmental Protection Agency’s December 2021 ambitious rulemaking for greenhouse gas emissions for model year 2023–26 vehicles is in keeping with President Biden’s goal of having half of all new U.S. light vehicle sales be emissions-free (battery-electric/BEV, plug-in hybrid/PHEV, and fuel cell/FCEV).
She pointed out that the bipartisan Infrastructure, Investment, and Jobs Act similarly supports the transition to electric vehicles, with funding for electrical grid improvements, battery materials and recycling research and development, and importantly, $7.5 billion to fund a network of 500,000 EV chargers.
The President’s Build Back Better proposal contains language to revamp the consumer EV tax credit and support an increased market share for zero-emission vehicles, Dziczek said. The current $7,500 credit has a 200,000 unit cap that GM and Tesla have exceeded, and Ford, Nissan, and Toyota are rapidly approaching, she added. The House version of the bill includes an uncapped ten-year program that provides a $7,500 tax credit for consumers who buy any type of battery vehicle. An additional $5,000 in tax credits is available, she said, if the vehicle was made by domestic union workers ($4,500), and includes U.S. made battery cells ($500). In addition, imported EVs would not qualify for the credit after 2026. According to Dziczek, this proposal drew strong opposition from U.S. trading partners, with over 20 foreign ministers threatening trade retaliation if the House version of the EV credits were to become law.
Dziczek said the Biden Administration’s push to advance the U.S.’s competitive position in electric vehicles should be seen in the context of the White House’s broader industrial policy response to China. China is a significant source of critical minerals and EV components and is a global leader in battery production and essential electronics and semiconductors, Dziczek said. The United States Innovation and Competition Act, which has already passed the Senate, would put more funding into research, development, engineering, and manufacturing of a wide range of high technology products, she added, including $52 billion to expand U.S. semiconductor capacity.
The next speaker, Michael Robinet, IHS Markit, spoke about how recent trends will impact the ability of the auto industry to pivot to an electric and autonomous vehicle future, with particular challenges regarding inputs, labor, and logistics. Both suppliers and auto makers have faced three years of high volatility and erratic production. While Robinet said he expects to see slow improvement in production volumes this year, supply-chain volatility is likely to persist throughout 2022 and linger into 2023. Reflecting this uncertainty is Robinet’s forecast that North American vehicle production could range anywhere from 14 to 16 million in 2022.
Robinet also noted that a potentially significant change in the geography of vehicle production may occur with the shift to electric vehicles. He explained that the proximity of suppliers to production is more critical with electric vehicles. And the need for battery plants and electronic components makers to be closer to final production is likely to make production more region centric, he said. In this context, Great Lakes auto production will rebound in the near term, he added, but not at the pace that will be seen in the South. Internationally, Mexico is receiving considerable attention for co-location of production of vehicles and their components.
Finally, according to Robinet, electric vehicles will see a rapid rise in total vehicle production levels and share. IHS projects that the North American production shares of ICE vehicles and BEVs will equalize in 2030 as ICE vehicle production decreases and BEV production increases. Also, the IHS forecast has electric vehicles reaching 41% of U.S. production by 2030. The increase in the electric share of the market will also influence a lengthening in the duration of the underlying vehicle platform, Robinet said. Traditional vehicle platforms have five-year lifecycles, while electric vehicle platforms will extend to eight or nine years, he said. Meanwhile, Robinet emphasized that in 2030, two-thirds of vehicles (ICE and hybrid) will contain engines versus the close to 100% that do today, which will have a significant impact across the industry.
Panelists at this year’s Automotive Insights Symposium said they anticipated another year of uncertainty for vehicle production, as the industry deals with short-term challenges while continuing to lay the groundwork for longer-run structural adjustments. The short-run challenges of higher vehicle prices and low inventory levels seem likely to persist into 2023, according to many of our speakers. A number of the symposium’s panelists pointed out that rising lending rates and ongoing supply-chain bottlenecks, including labor shortages related to pandemic impacts, are likely to make the short-run challenges the industry faces even harder to overcome. Meanwhile, the transition to electric and autonomous vehicle production will challenge all aspects of the industry. Some of our speakers argued that clear guidance on the direction of federal policy and stronger indications of private capital’s take on electric and autonomous vehicle development would help smooth the transitions. If the impassioned response to recent site selections of battery and vehicle manufacturing plants is any indication, policymakers and investors will have much to consider, including, but not limited to, the impacts on global trade, the labor market, and acceptance by all consumer demographics. All in all, it seems fair to say that over the course of this decade and the next, the automotive industry is set to undergo an incredible transformation that will have long-lasting societal implications.
1 OE is the original equipment that is installed in a car at the factory.