Carmakers have a major structural dilemma

The automobile industry makes no secret of the shortfall as it struggles to get back to pre-pandemic levels of sales and production. This will take some effort to resolve.

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  1. Charles Stanley

In 2020, world car sales fell 15.8%, with the largest falls in Europe (21.5%) and the smallest in China (2.2%). Much of this was the result of the closure of car plants during lockdowns brought on by the spread of Covid-19, and by a stay-at-home population that had less need for new cars – and other worries on their minds.

This year has seen a revival from the lows, but total volumes are still well down from those recorded in 2019 and previous years, with the European Union (EU) experiencing significant falls.

In June 2021, Germany produced just 247,000 cars compared to 305,000 in June 2020, 375,000 in June 2019 and 495,000 in June 2018. (Source: VDA). Output at half the level three years earlier is, clearly, disappointing.

The worldwide industry gives us the same explanation as German carmakers for these sales falls – a shortage of semiconductors. In the last few days, Toyota has announced a 40% output cut to be implemented in September this year, with the other major manufacturers also announcing reduced working hours and lower production schedules.

It is true that there is a worldwide shortage of microprocessors. It also seems to be the case that the auto industry cancelled a lot of orders in lockdown as they fought to conserve cash and avoid excess stocks – whilst the makers of smartphones, tablets and laptops rushed in to order more as they faced boom conditions. Each generation of smart communication products – and each new car model – needs more chips of an increasingly sophisticated nature, which is adding to the demand pressures.

Economic nationalism

There is a rush by the US to invest in domestic capacity in chips to make them less reliant on Taiwan and Korea, the main world suppliers. Its plans will add to world capacity, which is much needed, and includes Intel, Samsung and Taiwan Semiconductor planning major new plants in the country. All this takes time to establish and get running, as chipmaking is a complex and long procedure. It typically takes 26 weeks to make a microprocessor once a factory is up and running well. There is unlikely to be significant new capacity this year.

Underneath this is a simple story of cars becoming so clever that they have defeated their own supply lines. It is the growing imperative of the transition from diesel and petrol vehicles to electric, which is most earnestly required in the European Union (EU) given their concentration on the journey to net zero, that is also driving this trend.

In Europe, national and local governments, encouraged by the EU, are imposing bans on diesel vehicles of various ages in numerous locations, moving to eliminate new petrol and diesel vehicles from car showrooms by about 2030. This is worrying people about what might happen to the use patterns and taxes on older internal combustion engine cars in due course. As a result, governments have been successful in putting people off buying new diesels. In Greece, the diesel’s market share of new-car sales fell from 63% to 27% between 2015 and 2019. In the UK this fell from 48% to 27% and in France from 57% to 35% (Source: Statista). This fall is continuing.

The reticence of buyers

Buyers have been less keen to rush to purchase the battery electric vehicles that governments recommend. Since the start of 2020, European all-electric battery-vehicle sales have been running at around 5% of the total. Generally, battery-electric and plug-in hybrids have about 10% of the total market. Overall, it appears as if the industry is losing total sales from the combined effects of negative consumer views of diesels, which is not yet balanced out by favourable views of electrics. This has produced more wait-and-see customers, who will let their existing car do some more work before it is sold or who will buy a second-hand internal-combustion-engine vehicle.

There is a danger in all this for the motor industry. The correct perception that a shortage of microprocessors is holding them back may deflect from proper attention to the structural issue: how will the industry woo more to electric cars as governments succeed in putting people off purchases of diesel and petrol offers?

The German industry is going to especially struggle to get back to where it was. The Japanese industry, now Tokyo has signed a tariff-free agreement with Europe, is consolidating more of its output at home to cut costs and increase domestic control. Uncertainty over how electric vehicles will be taxed, how quickly charge points will be put in – and how soon it will be before the prices come down to something more affordable – means further difficulties ahead even after some new chip factories are established.

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