Automotive forecasts. Is the automotive situation heading for the better?
On 14-January 2022, Eveneum and Santander Bank Polska co-organised a webinar entitled „Disruption in supply chains - forecasts for the automotive industry in 2022”. In the first part of the meeting Radosław Pelc- analyst of the automotive and TSL sectors of Santander Bank Polska and Rafał Dados - managing partner Eveneum shared market data with participants on such topics as: car sales volumes, consumer propensity to purchase a vehicle, dealer inventories, risks in commodity markets, new investments in semiconductor production capacity.
The highlight of the webinar was an expert panel discussion, featuring:
- Krzysztof Wesołowski - Purchasing Director, Bury
- Matthew Rak- Global Purchasing Director, Varroc Lighting Systems
- Paweł Iracki - Sales Director, FŁT Kraśnik
- Sławomir Welezinski - Regional Director Aftermarket in Eastern Europe , Delphi Technologies
To summarise the data presented initially, Matthew Rak confirmed the high level of orders from the OEM side. At the same time, he added that on the procurement side, the situation is still difficult. He stressed that the level of allocations from chipmakers is still between 60% and 70%. Any improvement in the situation will only happen when the production base increases. Matthew also highlighted force majeur events plaguing the industry, e.g.: the coronavirus pandemic, the long winter in the US, and more recently the floods in Malaysia and Taiwan. The floods resulted in a recent two-week shutdown of a quartz producer. Further discussion largely focused on electronics. Krzysztof Wesołowski highlighted the benefits of multisourcing. However, he pointed out that with the current market situation, it is very difficult to fulfil additional urgent orders from customers. He summarised the situation in the semiconductor market in his first speech as follows:
„... the crisis has been going on long enough that we have learned to live with it and it is no longer such a shock to us.”.
Given the outlook for automotive, our experts emphasised that the purchasing (supply chain management) strategies of the automotive manufacturers (OEMs) and for the first body (Tier 1) must change to adapt to the new reality. Krzysztof highlighted that financial risks throughout the supply chain are primarily dependent on OEMs. Christopher pointed out that the financial reports of the automotive manufacturers look solid, as does the record performance of the semiconductor manufacturers. Semiconductor manufacturers are demanding orders a year ahead, with no cancellations, no carry-overs, including a declaration that if the price changes, customers will take the contracted quantities anyway. The lack of proactive action by the main market actors to rectify the situation breeds frustration among first- and second-tier suppliers.
Which OEMs stand out for being proactive in tackling the crisis?
Mateusz Rak and Krzysztof Wesołowski particularly singled out the BMW Group for its proactive action. The brand is active in terms of agreements and vertical safeguards throughout the supply chain: first-tier manufacturers, second-tier manufacturers (e.g. tiles), third-tier manufacturers (components), fourth-tier manufacturers (e.g. quartz). For example, at the end of last year BMW has signed an agreement with Inova Semiconductors and GlobalFoundries. We are talking about incredible integration, contracting and securing component availability. The second OEM mentioned and complimented was Tesla, dubbed the „computer on wheels”, which has strong relationships with electronics manufacturers.
What is the situation in markets other than electronics?
Later in the meeting, the discussion focused on threats in supply chains other than electronics. Paweł Iracki spoke of difficulties in the availability of steel (especially flat products), polymers, cardboard, wooden pallets, stretching from spring 2021. The company was clearly experiencing an increase in costs with each month of 2021, and consequently a decrease in profitability. Focusing on steel, Paul gave an example of specific grades used for bearings.
Quotas are in place for steel imported from outside Europe, quantified for each quarter. As of 11 January 2022, the quarterly quota is already used up in 30% for the steel his company needs for production. This shows that the problems will continue this year.
An additional element affecting the cost of operations in 2022 will be energy and gas prices, which are a challenge for the whole of Europe. Paul shared an example from a partner in Slovakia. The supplier in the previous energy supply contract had a price of 30EUR per MWh. It is now up to 300EUR per MWh. Forges that need to heat the material with electricity have even shut down their production capacity. This may make it even more difficult to buy materials, components on the market. Slawomir Welezinski, looking at the outlook for motoring, he focused on the situation in the spare parts market. He confirmed Paul's words about the difficult situation on the steel products market. He gave the example of the brake disc as a final product to illustrate the situation. Most of the market is sourced from manufacturers in China. In about 15 months, the cost of a brake disc increased by 30%-35%. Three factors contributed to this: raw materials, logistics, and power supply constraints to Chinese factories. In 2020, the price increase at manufacturers was in stages, but in 2021 it has already jumped - by double digits. Last year, for example, before Christmas itself, a supplier of brake discs announced that the delivery was ready to go, but on condition that they accepted an increase of X per cent. The supplier said that if they could not accept this increase without negotiation, „he understood and would sell the goods to someone else”. Delphi has set up a new factory, but the start of production is hampered by challenges in global supply chains.
Can shortages affect industry innovation and changes in demand patterns?
Matthew Rak shared two examples. One customer is extending the life cycle of one of its products (cars), delaying the introduction of a new model. Another customer returns to a less technologically advanced solution. Due to shortages in the availability of LEDs (leds), he is going back to incandescent bulbs.
Until recently, this seemed impossible, as the incandescent market was shrinking by 20%-30% per year.
Customers are also opting for solutions without a reversing camera, for example. This is definitely a step backwards in terms of product innovation," concluded Matthew. Companies in the aftermarket segment are benefiting from the current situation. Slawomir Welezinski noted that fleet customers are staying with their current cars, renewing their leases. The result is additional maintenance, driving business. Paweł Iracki gave the example of his business partners, who ordered trucks before Christmas 2021 and got confirmation of the order for 2023. In conclusion, participants said that supply is and will continue to be a brake factor to stabilise the situation in the coming months. The outlook for automotive continues to look unfavourable.
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