China revisited its zero-COVID policy, reducing the severity of shutdown, quarantine and travel regulations. Original equipment manufacturers (OEMs) and suppliers continue to invest in electrification, publicizing their electric vehicle (EV) and battery development plans. Automotive inventory is at its highest level since April of 2021, but sales performance looks unpromising due to economic conditions.

In this issue, A&M provides an update on crucial raw material and freight prices, as well as the impact on OEMs and suppliers as the selected topic for the December Industry Focus.

In transaction news, VinFast and Zeekr have filed for IPOs in the U.S., despite adverse market conditions. BorgWarner plans to spin off two of its divisions, creating an additional public company and slimming down its core business. Lastly, strategic partnerships and joint ventures continue to have an electric focus, propelling OEMs closer to reaching net zero emissions.

In regulatory news, union activity has increased, as benefits, labor and human rights become a topic of focus for automakers.

Additional December insights are included below.

Financial Performance

Auto Forecast Solutions’ (AFS) latest numbers show that part shortages, shutdowns and delays have resulted in approximately 4.4 million lost vehicles globally during calendar year 2022. Despite recent improvements in November, North America has seen a late surge in the current year for additional lost vehicles due to the semiconductor shortage. Other regions including South America and China may also cut their production outlooks in December, citing continued chip supply issues and COVID-19 outbreaks, respectively. The latest AFS estimates suggest approximately 4.6 million total cars and trucks will be affected by chip-related disruptions in 2022, which ultimately brings the 2-year aggregate lost vehicle total to roughly 15 million.

Electric vehicles remain too expensive for OEMs, suppliers, and consumers. With roughly 40 percent of an EV’s cost being attributable to its battery pack, the price and availability of raw materials presents numerous long-term challenges to global-scale manufacturing and mass EV adoption. The average electric vehicle costs approximately $65,000, with the owner demographic largely consisting of higher-earning individuals. It is important for automakers to capture the EV market demand, but simultaneously assess cheaper and more efficient alternatives for cleaner energy in an EV future.

Industry Update

Automotive inventory increased by 106,000 units in November, resulting in approximately 1.65 million total units. This translates to a days’ supply (DS) of 37, which is 28 percent below the five-year average. Inventory levels are up 46 percent year-to-date, representing an approximate 521,000 unit increase in the number of autos on hand. Despite the total inventory number remaining below the historical industry norm by a margin of roughly 1 to 2 million vehicles, pickups and vans are recovering from their COVID-19 low-points while passenger vehicles lag behind. The lower inventory levels are most heavily concentrated among Japanese and Korean automakers, as U.S and European automakers continue to get much closer to five-year average levels.  As macroeconomic pressure continues to grow, the near-term demand remains uncertain and may result in a continued increase of cars on dealer lots.  

New light vehicle sales in the U.S. increased 7.8 percent year-over-year in November with a 14.1 million seasonally adjusted annualized rate (SAAR) of sales, while the full-year sales pace is tracking at 13.6 million units. This would be the third year in a row that light vehicle sales in the U.S. will be below 14 million units.  Industry disruptors, such as supply chain issues and plant shutdowns, will likely stretch into the new year, hampering production and limiting inventories when compared to the industry’s pre-pandemic average. Although sales have increased year-over-year in each of the last three months, the overall sales weakness in 2022 was due to a constricted inventory environment, which is expected to continue into 2023 and further affect car sales. Average transaction prices also increased year-over-year in November, resulting in a 2.8 percent increase to $45,290 per vehicle.

Industry Focus – Raw Materials & Freight

OEMs and suppliers have been continuing to battle unfavorable and consistent disruptions to the industry ever since the onset of COVID-19, especially the costs of raw materials and freight. As automakers continue to shift to EVs, the pricing of essential vehicle inputs and transportation costs will be a crucial component to successfully transition.

In this month’s industry focus section, A&M revisits the pricing for key raw materials and freight in the automotive industry and the respective impact as OEMs continue to push into developing EVs.

Raw Material Pricing

The automotive industry uses a variety of raw materials to manufacture vehicles, many of which have seen increased levels of demand and shortages of supply, especially in wake of the movement to electrification. The purchasing environment has seen significant developments in the last year, as some OEMs have struck deals to land supply contracts for these critical resources. Despite these contracts, auto companies still must purchase several of these commodities based on market prices, in addition to many suppliers buying these raw materials directly from the OEMs themselves. Although several of these metal and material prices have decreased from their record highs, OEMs and suppliers are still operating in a heightened pricing environment when compared to historical levels, impacting margins and profitability in a period of increased capital expenditures and investments for EVs and batteries.

See the chart below for key raw materials and their respective prices and cost increase over the last 3 years.

Freight 

The automotive industry has a complex and global supply chain, which has endured substantial logistical problems since 2020. The shipping industry has experienced high levels of volatility over the past three years, seeing record high costs resulting from COVID-19 that was shortly followed by softened demand, supply growth and reduced pricing power. Auto and parts manufacturers heavily rely on timely shipping and container prices to effectively meet production schedules and consumer demand. 

According to the World Container Index (WCI), container rates have decreased by nearly 80 percent since October of 2021 to $2,138.70 per 40-foot container. At the same time, the number of containers is expected to grow by 29 percent of the current world supply, creating an imbalance of supply and demand that is projected to recover in 2024. These matters, coupled with inflationary pressures, will likely present favorable pricing to automakers and suppliers over the near-term, while they continue to battle other elevated operational costs.

The chart below displays the WCI, which reports spot freight rates for 40-foot containers on eight of the major global trade routes. 

Transaction Activity

In recent transaction news, IPO activity proves to be resilient amid the current economic landscape as EV manufacturers VinFast and Zeekr plan to go public in the U.S. in 2023, both seeking valuations of approximately $1 billion. Additionally, BorgWarner has announced its intention to spin off its fuel systems and aftermarket segments into a separate publicly traded company, while focusing on its legacy business that will consist of its electric propulsion, drivetrain, and air management divisions. Lastly, Navistar and TuSimple have ended their deal to co-develop autonomous trucks, and Rivian and Mercedes are pausing their JV for manufacturing electric vans in Europe.

See below for additional detail on recently announced transactions.

• Volkswagen (VW) and Enel X Way have both invested $105.4 million in forming a joint venture, Ewiva, which plans to build 3,000 high-speed EV charging points across Italy. Ewiva expects 500 charging locations to be operational by the end of 2023, with compatibility for all EV models and fully powered by renewable energy sources.
• Stellantis and Qinomic, a high-tech mobility company, have strategically partnered to create a retrofit solution for converting internal combustion engine (ICE) light vehicles to an electric drivetrain. By using Stellantis’ circular economy and commercial vehicle business units, the partnership aims to drive electrification and sustainability, while achieving net-zero carbon emissions by 2038.
• Stellantis has acquired aiMotive, a Hungarian-based developer of advanced artificial intelligence (AI) and autonomous driving software. Although the transaction details remain unknown, the start-up will operate as a subsidiary of Stellantis and expects to generate over $20 billion in incremental revenue.
• Indonesia’s Indika Energy, through its subsidiary PT Mitra Motor Group, has announced its joint venture with Foxconn. The JV, PT Foxconn Indika Motor (FIM), plans to manufacture EVs and electric batteries, supporting the country in reaching its target of 2 million EVs and 13 million e-motorcycles by 2030, in addition to becoming a leading electric ecosystem developer for the auto industry. 

Regulatory Landscape

Hertz Settlement: Car rental company, Hertz, has recently stated that it will resolve approximately 95 percent of outstanding customer claims through a $168 million dollar settlement. The claims originate from errors in filing wrongful vehicle theft reports. The settlement will be mostly covered by insurance reimbursements, having a minimal impact on the company’s capital return. 

Autoneum Plant Strike: Autoneum, a Swiss-based sound and heat insulation systems supplier, recently had 270 workers go on strike at its manufacturing plant in Pennsylvania in response to an unfavorable union contract offer. The week-long strike was ultimately resolved, preserving the current cost structure for Autoneum and improving employee benefits.

NHTSA Vehicle Safety Probe: The U.S. National Highway Traffic Safety Administration has opened up new safety probes into over 2 million Honda, Jeep and Ram vehicles. While no crashes or injuries have been reported, the agency is investigating several issues that include loss of vehicle power, braking systems, and hydraulic control units. 

Stay connected to industry financial indicators and check back in January for the latest Auto Industry Spotlight. 

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