Microprocessor shortages drive up vehicle costs.

In the long term, many automakers have chosen to take control of several aspects of their supply chain, such as Tesla, which purchased a graphite processing plant to secure their supply.

(Photo: TierneyMJ/Shutterstock.com)

Few industries have felt supply chain-induced inflation more than the auto industry, and many analysts warn that relief could still take months or even more than a year.

Automakers pioneered just-in-time inventories decades ago. When they work, these systems reduce costs and optimize resources throughout the supply chain.

But when factories closed around the world during the pandemic, this tightly coordinated system also closed. Now, as demand returns to full steam, automakers and their complex network of suppliers are scrambling to keep up.

The result is record inventories on new car lots. Drive one and notice how the vehicles are spaced out to mask the thinness of these terrains. And with fewer new vehicles on the market, demand for used vehicles is also near record highs, driving up prices for both.

Fleas

The beacon child of automotive supply chain woes are the microprocessors that drive nearly every advanced component in a vehicle — and these days, it’s most of them.

Chip supplies were thin before the pandemic, but the shortage is beyond crisis point after the global shutdown.

On the positive side, some industry sectors say they have fewer chip shortages, but will likely continue to be a problem for at least another year.

Beyond the just-in-time inventory shock, the chips are also in demand by more than automakers. Economy-wide competition for semiconductors has increased, not only phones and computers demand processors, but also things like smart refrigerators and other new smart devices on the market, not to mention of demand from cryptocurrency miners.

In light of the shortage, many manufacturers are now overordering, but that could mean that if everyone orders more than they need, there could be an unbalanced supply chain for a long time while everything regularizes.

For their part, chipmakers are scrambling to revive supply, and there are even high-profile plans to expand some factories and build new ones closer to the US market.

But backlogs take time to clear and new plants take years to come online, so it’s likely to be some time before capacity returns to on-demand supply from a few years ago to sadness.

Spare parts

Cost increases for the automotive industry are not limited to microprocessors alone. According to the St. Louis Federal Reserve, auto parts as a whole have seen their costs rise 17% over the past year.

With global turmoil and ongoing pandemic shutdowns, not to mention raw material costs, almost everything that goes into making a new vehicle costs more. A dramatic example is in the wiring harness.

Wiring harnesses are normally an inexpensive component that rarely gets a second thought. However, they are used throughout the vehicle and many were made in Ukraine.

After the Russian invasion, these humble but essential components are much harder to find, forcing automakers to scramble and find alternatives.

And the problem is deeper. Ukraine was also the supplier of about a quarter of the world’s neon gas, an essential input to many advanced components of modern vehicles. In addition, other key raw materials came mainly from Russia, many of which are now subject to international sanctions.

Electric vehicles (EVs) are also not spared from supply chain issues. Critical battery components, such as lithium, nickel, cobalt and graphite, are in short supply globally now that most automakers have pledged to switch to electric vehicles, also leading to shortages and spikes price there.

And inflation, in general, is also driving up prices, with wages in the manufacturing sector rising at an annualized rate of 18% in the first three months of the year.

Find solutions

In the short term, many automakers have turned to so-called selective manufacturing in response to supply chain issues. This means that they focused on manufacturing only their highest margin vehicles, ensuring that they were always able to maintain their return on investment.

But it means the supply shortage is now being felt unevenly across the market, with different areas being squeezed more than others.

In the long term, many automakers have chosen to take control of several aspects of their supply chain, such as Tesla, which purchased a graphite processing plant to secure their supply.

As pandemic shutdown-induced shortages ease, automakers will begin to see relief from their longtime suppliers. But many have taken this shock as an opportunity to rethink what their supply chain and business models should look like in the future.

Michel Giusti, ([email protected]), is an analyst and senior writer for InsuranceQuotes.com.

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