How a shortage of cars is putting the world’s economy at risk

Turmoil in the auto industry, a powerful engine of the global economy, is threatening growth and sending tremors through companies and communities that depend on carmakers for money and jobs.

For every car or truck that does not roll off an assembly line in Detroit, Stuttgart or Shanghai, jobs are in jeopardy. They may be miners digging ore for steel in Finland, workers moulding tires in Thailand, or Volkswagen employees in Slovakia installing instrument panels in SUVs. Their livelihoods are at the mercy of supply shortages and shipping chokeholds that are forcing factories to curtail production.

Supply shortages and shipping chokeholds are hitting carmakers around the world. Credit:Bloomberg

The auto industry accounts for about 3 per cent of global economic output, and in carmaking countries like Germany, Mexico, Japan or South Korea, or states like Michigan, the percentage is much higher. A slowdown in automaking can leave scars that take years to recover from.

The shock waves from the semiconductor crisis, which is forcing virtually all carmakers to eliminate shifts or temporarily shut down assembly lines, could be strong enough to push some countries into recession. In Japan, home of Toyota and Nissan, parts shortages caused exports to fall by 46 per cent in September compared with a year earlier — a potent demonstration of the car industry’s importance to the economy.

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

Paul Jacques is among the people who may be most profoundly affected. He works in Tecumseh, Ontario, for a division of components supplier Magna International, which makes seats for a nearby Chrysler minivan factory.

Jacques, 57, was on the assembly line when he heard that Stellantis, Chrysler’s parent company, planned to eliminate a shift in Windsor, Ontario, because of shortages of semiconductors, the computer chips essential to cruise control systems, engine management and a host of other functions.

Jacques and his co-workers knew that their jobs were in danger, too. “The mood became incredibly sombre,” said Jacques, whose two children also work at the seat factory.

Carmakers have been able to blunt some of the sting by raising prices, passing on some of the pain to car buyers. Ford and General Motors last week both reported big drops in sales and profits for the summer period, but raised their profit forecasts for the full year. Daimler, the maker of Mercedes-Benz cars, said Friday that its net profit rose 20 per cent in the third quarter even though the company sold 25 per cent fewer vehicles. Higher sticker prices more than compensated.

A global shortage of semiconductors is slowing down production. Auto companies have been allocating scarce chips to high-end and other vehicles that generate the most profit, leading to long waits for less expensive vehicles.Credit:Bloomberg

The pain is falling hardest on workers and anyone in need of an affordable car. Auto companies have been allocating scarce chips to high-end and other vehicles that generate the most profit, leading to long waits for less expensive vehicles. Used car prices are skyrocketing because of the lack of new cars.

Vehicles with high profit margins like Ford F-150 or Chevy Silverado pickups “are continuing to get pumped out,” said Ram Kidambi, a partner at consulting firm Kearney who is based in Detroit. “But vehicles that have lower margins are getting impacted, and therefore the workforce there is getting impacted.”

The crunch started last year as the prices of key raw materials like steel and copper began climbing, said Viren Popli, CEO of Mahindra North America, an arm of the giant Indian vehicle manufacturer that makes tractors for the United States market.

It’s difficult to calculate just how much auto industry problems will spread to the rest of the economy, but there is little doubt that the effect is enormous because so many other industries depend on carmakers. Auto manufacturers are big consumers of steel and plastic, and they support vast supplier networks as well as restaurants and grocery stores that feed autoworkers.

“If the Windsor plant is not working, everybody feels the effects,” said David Cassidy, president of Unifor Local 444, which represents workers who build Chrysler minivans there.

A slowdown in automaking can leave scars that take years to recover from.

Car factories — like the Stellantis facility in Ontario — are often the biggest private-sector employers in their communities, making shutdowns all the more devastating. Because car plants tend to dominate the local economy, they are difficult to replace. Unemployment caused by car factory shutdowns persists for years, according to a study in 2019 by the International Monetary Fund.

AlixPartners estimates that shortages mean that 7.7 million fewer vehicles will be produced this year, costing the industry $US210 billion in lost revenues.

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

Slovakia, with only 5.4 million people, is home to large Volkswagen, Peugeot and Kia factories and produces 1 million cars a year, more per capita than any other country. The industry accounts for more than one-third of Slovakia’s exports.

The longer that shortages persist, the deeper the economic effect. Modern economies need vehicles to function. Trucks, essential to moving goods, are hard to come by these days, a constraint on growth.

“We are basically sold out in Western Europe and North America until next year,” Martin Daum, the head of Daimler’s trucks unit, said, citing the chip shortage.

There is no sign the crisis will end soon. Semiconductor-makers have promised to increase supply, but building new factories takes years and car companies are not necessarily the most important customers.

“Semiconductor manufacturers are going to give priority to the Apples and HPs of the world,” said Gad Allon, a professor at the Wharton School, “not a Ford.”

This article originally appeared in The New York Times

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

Most Viewed in Business

From our partners

Source: Read Full Article