Just like Tom Brady and the Super Bowl, I’m back. Here’s what’s cookin’ today in Transmission:
- Import volumes at Georgia port flying high
- Chipmakers increasing investment to address global demand and chip shortage
- Industry news
Import volumes at Georgia port flying high
Port congestion in LA is no joke. At the beginning of this month, there were 40 ships anchored outside the port awaiting berths. Unpredictably high volumes, labor constrained by COVID outbreaks and a lack of additional throughput capacity have resulted in widespread delays. I thought it would be a good idea to look at the Port of Savannah, Georgia, one of the major automotive supply chain hubs for ocean shipping.
To keep it short and simple, container rates and volumes are both hitting highs. There were 2,060 bills of lading recorded at the beginning of February 2020. What about this year? Great question. Savannah is sitting at 4,051 bills of lading. That’s nearly a 54% increase in the number of shipments being cleared for entry into the United States. Container ships have limited real estate to hold product and, as a result, spot rates have been trending upward. As shippers look to reduce costs, carriers have the upper hand setting contract rates, which means transportation budgets are at risk of being completely blown.
When will volumes stabilize? At the beginning of this month, FreightWaves’ Greg Miller wrote about the impact that port congestion has had on trans-Pacific trade (very informative, I highly recommend reading it). Many liners have postponed trips to avoid gridlock at LA and Long Beach, which means volumes will remain high in the coming months.
Chipmakers increasing investment to address global demand and chip shortage
The global shortage of semiconductors has been the major theme of 2021. Pandemic-induced production facility shutdowns caused automakers to ease chip orders. Once OEMs went back to work, production revved back up and demand for chips increased faster than anyone originally anticipated. As a result, semiconductor manufacturers, primarily located in Asia, are quickly reallocating automotive chip production capacity to lessen the blow of the supply strain.
One problem has been brought to light as a consequence of this bottleneck: outdated infrastructure. According to Auto News, a majority of 8-inch auto chip facilities are victims of underinvestment in recent years. The solution? Chip manufacturers are undergoing different investment strategies, including relocating plants and acquisitions, in an effort to increase capacity.
United Microelectronics Corp (UMC), a Taiwaense chipmaker, is spending $1.5 billion on new equipment. SK Hynix, a South Korean chipmaker, has expedited plans to relocate 8-inch chip facilities to China in order to meet the growing need as quickly as possible. Renesas Electronics Corp. is in advanced discussions to acquire Dialog Semiconductor, an Anglo-German chip designer, for $6 billion in cash to take advantage of demand.
Another problem suppliers and OEMs are experiencing is higher prices. The simple laws of economics state that if supply can’t keep up with demand, then prices will rise. UMC is expecting chip prices to increase by 4-6%. Renesas has been negotiating a 15% price increase on auto chips. I think we’re going to see a ripple effect of increased procurement costs throughout the vehicle production cycle that works very similar to what we’ve seen with EV batteries (the more expensive the battery, the less affordable the car).
I also think this disruption is serving as a wake-up call. Digitization is becoming more prevalent within the auto industry and will play a larger role in the future. It will be extremely difficult for current chip production infrastructure to keep up with future demand. Chipmakers should be taking this headache and using it as an opportunity to prepare for the digital age coming around the corner. OEMs, as challenging as it may seem, have to diversify chip suppliers in case there’s another production issue that comes up.
I’m not the only one who thinks the real problem lies ahead either.
“Chips are so crucial to a modern vehicle that relying on one supplier for your chips opens the door to a problem like this,” said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions. “Ensuring that supply is crucial to these companies. While they’re definitely nervous at this point, the true problem with the lack of supply is potentially down the road.”
I understand that this shortage has been a recurring segment in recent editions of this newsletter, but there are lessons that can be gleaned from this setback:
- Rethink the way your network is built. Flexibility is key when the normal processes in place fail.
- OEMs should identify and mitigate risks in lean inventory models.
- Software use in vehicles is only going to increase from here. Suppliers need to invest in technology that helps OEMs meet consumer expectations.
Industry news:
- Tesla (NASDAQ: TSLA) is making headlines again. This time the automaker invested $1.5 billion in Bitcoin and is planning to accept it as a form of payment. Tesla has adjusted its investment policy to allow the company to invest in digital assets as well as gold bullion and gold exchange-traded funds.
- Rumor mill: A couple of weeks ago, there were rumors spreading about Apple’s efforts to create an autonomous vehicle with Hyundai. Last week, these rumors shifted to Kia Motors, which is a part of the Hyundai Motor Group. However, as of Monday, both companies have denied these talks: Shares of Hyundai fell by 6.2% and shares of Kia fell by nearly 15%.
- Dealership employment levels have almost caught back up to pre-pandemic levels. Before the virus hit the U.S., employment at dealerships was about 1.1 million. According to the U.S. Bureau of Labor Statistics, dealer employment fell to 888,200 jobs in April of last year before bouncing back to 1.08 million at the end of December. Adam Robinson, CEO of dealership recruitment technology firm Hireology, believes that dealers were overstaffed to begin with and doesn’t expect the remaining 5 to 10% of lost jobs to return.
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