It never rains, but it does pour for the auto industry.
In 2019, car salespeople were slapping high fives right across Canada. It was the fourth-best year on record for new light vehicles. The previous three years had also been successful. The dismal recession of 2008 was distant in the rear-view mirror.
Then came the COVID-19 pandemic. Assembly plants shut down for weeks at a time as everyone stayed home. Dealerships struggled to find ways to sell cars. But that doesn’t mean we all stopped wanting cars.
Last year picked up sooner than anybody expected, and those salespeople started feeling happy again. Not overly happy though, because the assembly plants couldn’t just switch back on overnight. They all operate with “just in time” efficiency, bringing in their supplies (and paying for them) only when they’re needed. Shutting down the lines created a domino effect along the considerable length of the supply chain.
When the automakers did start producing cars again, there were a backlog of orders, and we all had to be patient. “Just a few more weeks, folks,” we were told by car people and politicians alike.
So to cheer ourselves up, we carried on ordering new TVs and game consoles and smart phones – all of which require the same semiconductor chips that are also used in cars. \When the automakers eventually picked up the phone to place orders, chip makers put them on hold.
Surprise! If you’re a chip maker, you suddenly have Ford and Honda on one side trying to place an order for all you can produce even though they left you hanging for a couple of months. On the other hand, $2-trillion Apple is trying to place the same order for its iPhones and Macs. Where does your loyalty lie?
Computer microchips are complicated things, and it’s not easy to ramp up production. It takes billions of dollars over several years to build a chip-manufacturing plant, which is a big commitment to make for customers as fickle as the automotive industry.
But this was just the rain, not the storm.
In February, the winter weather in Texas literally froze production of microchips. It also crippled the supply of the petroleum products used for making automotive resins, plastics and seat foam. The same month, an earthquake in Fukushima knocked out some major Japanese parts suppliers, stalling assembly lines in North America for Honda and Toyota.
Earlier this month, Ford started stockpiling some of its production F-150 pickups and Edge SUVs, storing the almost-complete vehicles until it can fit missing electronics modules, which need chips. These control basic things like the windshield-wiper motors and the radios.
A fire on March 19 halted production of semiconductor microchips at Renesas Electronics Corp.’s plant in Naka, Japan, straining the supply chain past its breaking point.
And don’t forget about what’s been going on with our shipping ports. COVID-19 had already created a shortage of shipping containers, which has caused confusion at ports around the world. Then the Ever Given super-freighter went and blocked the Suez Canal, effectively stopping movement between Europe and Asia. You’d better believe that some of those300 freighters stalled at the ends of the canal are carrying computer chips in their holds.
Automakers are now mostly on the ground, begging for mercy.
On March 26, Toyota said that the company still doesn’t know what this all means for them. Nissan, which suspended production of its Murano in Tennessee and the Versa and Kicks in Mexico, said much the same. Stellantis, which is the new parent company of Chrysler and Fiat, will idle both its Windsor and Brampton, Ont., plants next month. Honda is already down about 50,000 vehicles from its previously scheduled North American production.
Bloomberg reports that analysts estimate the lost revenue for car makers will be more than US$61-billion this year, with a loss of at least 1.1 million vehicles from scheduled production – and that was before the freighter got itself stuck.
In 2021, it’s been one hit after another. This is good news for the used-car business, so don’t feel too bad for Canadian dealerships. But it’s terrible news for the 125,000 Canadians directly employed by the automotive manufacturing industry.
So here’s an idea for the automakers: Stop living day-to-day and passing on the costs of production and storage to third parties, and start planning better for a worst-case scenario. Because there are always more worst-case scenarios.