Disruptions caused by shortages and production shutdowns continue to plague the industry as supply stabilization will not occur until mid-2022. Total vehicle inventory continues to decrease and sales performance is worsening as a result.

In this issue, A&M provides an in-depth analysis of rising prices in key raw materials as the selected topic for the September Industry Focus.

In the transaction market, Volvo is rumored to be seeking an IPO at a valuation of $20 billion. Other automakers are engaging in strategic partnerships to develop next-generation technology.

Large automakers have not mandated vaccinations for employees as of yet, but President Biden has requested for the Department of Labor to implement additional testing and vaccine requirements for large corporations. Meanwhile, the state of New York has identified 2035 as the deadline for selling gas-powered passenger vehicles.

Additional September insights are included below.

Financial Performance

The latest Auto Forecast Solutions’ (AFS) numbers show that shutdowns and delays have already resulted in 8.2 million lost vehicles, which is an increase of approximately 888,000 from the prior week figures. AFS now estimates approximately 9.4 million cars and trucks will be affected by chip-related supply disruptions in total as the worst-case forecast has increased approximately 55% in the past two months.

The resurgence of COVID in key locations of the supply chain has exacerbated the issue in recent weeks as production delays continue to mount. Toyota recently cut output by 40% for the second consecutive month due to shortages of chips and wire harnesses, GM extended production cuts at a variety of plants, Ford shut down a Missouri plant for an additional week, and Stellantis extended downtime to certain U.S. and Canadian plants by two weeks. Automakers are working through the supply chain turbulence, but the issues are undoubtedly causing an uncertain future for the entire industry.

Industry Update

Total auto inventory decreased by 58,000 units in August, resulting in approximately 1.1 million total units. This is the seventh consecutive month of an absolute decline in inventory and translates to a days’ supply (DS) 63% below the five-year average at 20 DS. While the monthly pace of inventory decline decelerated, this is a function of the sales pace also declining, evidenced by the 13.1 million seasonally adjusted annualized rate (SAAR) of sales in August. This is a 14% year-over-year decrease and August marks the fourth consecutive month of decline in the SAAR as sales were well below consensus estimates.

Issues stemming from the chip shortage and production shutdowns were previously expected to improve from a trough in the second quarter of 2021. However, due to COVID resurgences and shutdowns in Malaysia and Southeast Asia, both of which are key locations in the semiconductor supply chain, the timeline for a return to stabilized production has been extended. IHS projections expect for the third quarter of 2021 to be similarly affected by the shortages as the second quarter, and the fourth quarter of 2021 does not look promising for a return to normalcy. IHS now expects supply chain disruptions to persist into 2022 with the earliest return to stabilized supply being the second quarter of the upcoming year.

Industry Focus – Raw Materials

In this issue, A&M is taking a deep dive into recent price changes of common raw materials used in the production of a vehicle and implications to suppliers.

According to Bank of America, the estimated raw material cost per vehicle is nearing $4,500, which is the highest cost in approximately 10 years. Supply shortages are the primary culprit behind most price increases, although certain materials (e.g. lithium) have seen growth in demand outpace supply. The COVID-19 pandemic is the main factor in causing recent shortages as production facilities in North America and abroad are shutdown or operating at reduced capacity. Supply chain issues have been exacerbated by clogged ports and a shortage of shipping containers while worldwide demand for raw materials has remained elevated.

For some raw materials, auto suppliers purchase through OEMs, which removes price volatility risk for the supplier. Other suppliers are awarded purchase orders that contain indices that allow prices of component parts to change as raw material prices change, typically updated on a quarterly basis. In cases where resale programs or indexing are not available, or where auto suppliers don’t take advantage of those programs, there is significant price risk and many suppliers have seen margins erode or disappear in 2021. More suppliers have sought to renegotiate pricing for component parts based on this margin erosion, which oftentimes involves complex business and legal issues.

Key raw materials for the automotive industry are identified below to provide additional insight on their use and changes in price.

Transaction Activity

In the latest news in the automotive transaction market, Volvo is rumored to be in advanced discussions to IPO on the Stockholm exchange at a valuation of approximately $20 billion. After receiving an additional bid from Qualcomm at a higher valuation, automotive technology supplier Veoneer announced the current plan is to continue with Magna’s prior offer as negotiations continue. Electric vehicle maker Rivian is reportedly aiming to raise up to $8 billion in an upcoming IPO with a valuation of $80 billion. The Chinese electric vehicle startup Iconiq Motors is said to be considering an IPO in the U.S. through a SPAC merger at a valuation of roughly $4 billion.

See below for additional detail on recently announced transactions.

• Ford and partner company Argo AI will partner with Walmart to launch an autonomous vehicle delivery service. The service will deliver Walmart orders to customers using Ford Escape hybrid test vehicles and Argo AI technology. The initial launch is set to begin later this year in Miami, Washington D.C. and Austin.
• Bosch has agreed to supply fully assembled hydrogen fuel-cell power modules to Nikola. The fuel-cell power modules, which are expected to launch in 2023, will be used to power two of Nikola’s semi-trucks.
• Stellantis plans to purchase First Investors Financial Services’ parent company for approximately $285 million to create a captive financing company in the U.S. The acquisition is expected to close by year end and allows Stellantis to provide customers and dealers with a variety of financing options.
• Cox Automotive, a global company with a variety of automotive brands, announced the acquisition of Spiers New Technologies, a full-service provider for the management and maintenance of electric vehicle batteries. The purchase enhances Cox’s ability to provide necessary support to customers who own electric vehicles as demand for the vehicles continues to grow.

Regulatory Landscape

Vaccine mandates: President Biden recently directed the Department of Labor to draft rules requiring employers with more than one-hundred employees to mandate COVID vaccinations or implement weekly testing. As of now, no major automakers have required vaccinations for employees, but some continue to look further into the issue. The head of the UAW argued against requiring vaccines given that no UAW represented factory has faced an outbreak.

Infrastructure package: The U.S. House of Representatives will vote on the $1 trillion infrastructure bill, which has already been passed by the Senate, by September 27. Both the infrastructure bill and $3.5 trillion budget blueprint have significant ramifications on the automotive industry such as provisions encouraging electric vehicle adoption and vehicle safety updates.

New York emission standards: The state of New York banned the sale of gas-powered passenger cars beginning in 2035 with the goal of having all new sales being zero-emission vehicles. Medium- and heavy-duty vehicles have the same standards, but they will not come into play until 2045.

Chevy Bolt fires: General Motors has recently recalled every Chevy Bolt it has built due to the risk of battery fires. The recall includes roughly 142,000 vehicles and will cost GM $1.8 billion. GM is working with electric vehicle battery partner LG to clean up the manufacturing process and implement additional quality control measures for future production.

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