How the shortage of cars threatens the economy

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The turmoil in the auto industry, a powerful engine of the global economy, threatens growth and sends shocks to businesses and communities that depend on automakers for money and jobs.

For every car or truck that does not roll off the production line in Detroit, Stuttgart or Shanghai, jobs are at risk. These can be miners who mine ore for steel in Finland, workers who shape tires in Thailand, or Volkswagen employees in Slovakia who install instrument panels in sport utility vehicles. Their livelihoods are at the mercy of supply bottlenecks and supply bottlenecks that force factories to cut back on production.

The auto industry accounts for around 3 percent of global economic output; in automobile countries such as Germany, Mexico, Japan or South Korea or states such as Michigan, the proportion is significantly higher. A slowdown in automotive manufacturing can leave scars that take years to recover.

The shock waves of the semiconductor crisis, which is forcing virtually all automakers to break down shifts or temporarily shut down assembly lines, could be strong enough to drive some countries into recession. In Japan, home of Toyota and Nissan, parts shortages meant that exports fell 46 percent in September compared to the previous year – impressive evidence of the importance of the auto industry to the economy.

“It’s a very significant drag on growth and jobs,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Paul Jacques is one of the people who may be hardest hit. He works in Tecumseh, Ontario, for a division of component supplier Magna International that makes seats for a nearby Chrysler minivan factory.

Jacques, 57, was on the assembly line when he heard that Chrysler’s parent company Stellantis was planning to do away with a relocation in Windsor because of the shortage of semiconductors, the computer chips that are essential for cruise control systems, engine management, and many other functions.

Mr Jacques and his staff knew that their jobs were also at risk. “The mood became incredibly gloomy,” said Jacques, whose two children also work in the seat factory.

The automakers have been able to soften some of the sting through price increases and pass some of the pain on to car buyers. Ford and General Motors both reported large sales and earnings declines for the summer period last week, but raised their earnings forecasts for the full year. Daimler, the maker of Mercedes-Benz passenger cars, said Friday that its net profit rose 20 percent in the third quarter, despite the fact that the company had sold 25 percent fewer vehicles. Higher sticker prices more than compensated.

The pain hits workers and those who need an affordable car hardest. Auto companies have allocated scarce chips to the high-end and other vehicles that make the most profit, resulting in long waits for cheaper vehicles. Used car prices are skyrocketing due to the shortage of new cars.

Vehicles with high profit margins such as Ford F-150 or Chevy Silverado pickups “are pumped out further,” said Ram Kidambi, partner of the consulting firm Kearney based in Detroit. “But vehicles with lower margins are affected and therefore also the workforce there.”

The crisis began last year when the prices of key raw materials like steel and copper began to rise, said Virus Popli, CEO of Mahindra Ag North America, a branch of the giant Indian vehicle manufacturer that makes tractors for the U.S. market.

The world’s uneven recovery from the coronavirus pandemic left the distant links in the global supply chain out of sync and unable to connect. In late summer, the United States began delivering booster vaccinations while a devastating outbreak shut factories in Malaysia.

Mahindra quickly devoured his existing inventory of parts and then had to wait for supplies. But they were delayed in ports with hundreds of ships, and container costs rose from $ 3,000 to $ 20,000.

At a tractor assembly plant in Bloomsburg, Pennsylvania, Mr. Popli said, “We lost 25 percent of production for two months in a row due to container flow problems at the Port of Long Beach, California.

It is difficult to calculate how much the auto industry’s problems will spread to the rest of the economy, but there is no doubt that the impact is enormous, given that so many other industries are dependent on automakers. Automakers are large consumers of steel and plastic, supporting huge networks of suppliers, as well as restaurants and grocery stores that feed auto workers.

“When the Windsor plant doesn’t work, everyone can feel the effects,” said David Cassidy, president of Unifor Local 444, which represents workers who build Chrysler minivans there.

Auto factories – like the Stellantis plant in Ontario – are often the largest private employers in their communities, which makes closures all the more devastating. Since auto plants dominate the local economy, they are difficult to replace. According to a 2019 study by the International Monetary Fund, unemployment due to the closure of car factories has persisted for years.

In Eisenach, Germany, a city with 42,000 inhabitants, Opel is building a compact SUV called Grandland. But Stellantis, who also owns Opel, closed the factory in October and does not plan to resume production until next year. Workers fear the shutdown could be permanent; Stellantis also produces the Grandland in a factory in France that is still in operation.

The approximately 2,000 people who work at the Eisenach plant or the neighboring suppliers are on paid vacation. But Katja Wolf, the mayor of Eisenach, who joined a workers protest in front of the plant on Friday, said people are reluctant because they don’t know when the plant will reopen. That harms local businesses.

“The biggest problem is the uncertainty about the future when the auto industry is already in a state of upheaval,” said Wolf in an interview. “People don’t buy new cars or book expensive vacations. You are too worried. “

Opel wants to keep all German plants, including the one in Eisenach, said Opel boss Uwe Hochgeschurtz on Sunday in the Frankfurter Allgemeine Zeitung.

Semiconductors are not the only components that are in short supply. Automakers are also looking for the type of plastic used to hold wiper fluid and shape the dashboard, as well as the foam used to build seats, said Dan Hearsch, executive director of the Detroit office of global consulting firm AlixPartners.

In the absence of a tiny mount for SUVs, Hearsch said, the time it takes to fix a vehicle damaged in an accident has increased from 12 to nearly 20 days.

AlixPartners estimates that due to shortages this year 7.7 million fewer vehicles will be produced and the automotive industry will cost 210 billion US dollars in lost sales.

A relatively small number of countries account for most of the world’s production of automobiles and auto parts. These include the United States and China, as well as smaller countries such as Thailand.

Slovakia, with a population of just 5.4 million, is home to large Volkswagen, Peugeot and Kia factories and produces a million cars a year, more per capita than any other country. Industry accounts for more than a third of Slovakia’s exports.

The longer the shortage of parts and materials persists, the greater the economic impact. Modern economies need vehicles to function. Trucks, which are essential for freight transport, are hard to come by these days, an obstacle to growth.

“We’ll be practically sold out in Western Europe and North America by next year,” says Martin Daum, Head of the Daimler Truck Division, referring to the shortage of chips.

There are no signs that the crisis will end anytime soon. Semiconductor makers have promised to increase supply, but new factories take years to build and automakers aren’t necessarily the main customers behind the tech giants.

“Semiconductor manufacturers will prioritize the world’s apples and HPs,” said Wharton School professor Gad Allon, “not a Ford.”

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