In the Short Term, Supply Will Drive Demand

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The automotive industry was hit hard by the COVID-19 pandemic and its negative effects are still expected to continue affecting the sector during 2022. The recovery, expected for 2023, depends on demand behavior, supply chain resiliency and the changing needs of the market and countries’ regulations. These trends will shift the approach taken by OEMs and the entire value chain across the world, according to global analytics firm IHS Markit.

“We expect a great reset for the industry, which will be paralyzed depending on how many units can be manufactured, not on what consumers want. There are no inventories; it will be a great reset. Supply will drive demand, not the other way around,” said Guido Vildozo, Senior Manager, Americas Light Vehicle Sales Forecasting at IHS Markit.

The industry’s recovery will be guided by the supply chain, which has suffered shortages as vehicle output levels cannot keep pace. The expected global light vehicle sales forecast for 2021 is of 80.5 million, said Vildozo, thanks to the positive effects of vaccination programs and an increase in demand to pre-pandemic levels in key markets, such as China and the US. However, pandemic-related disruptions and supply chain bottlenecks will continue impacting the sector for the next 12 to 18 months.

The industry is moving forward and automotive innovations today come from electronics rather than mechanics. As automakers speed up toward CASE mobility, semiconductor chips have become essential. A single alteration in the supply chain could result in a massive impact for the entire sector. With 3Q21 close to its end, semiconductor shortage impact forecast for 2021 is over 10.5 million units globally and 2 million units for North America, according to Vildozo.

“When the Delta variant spread across South East Asia, which are Tier 2, Tier 3 and semiconductor chips suppliers, the problem got worse because they just entered the stage of lockdowns and the economy shutdown and reopening cycle usually takes between 6 and 8 months. Considering that the shutdowns began in July, the situation will be normalized by the end of 1Q22, limiting 2022’s production,” said Vildozo.

Regularizing the value chain is a complex challenge considering the pandemic different progress globally, macroeconomic factors and governments’ decisions. IHS Markit’s global light vehicle sales outlook for 2022 has an 82.62-million-unit base, with 80.62 million units with a pessimistic view and 86.46 as an optimistic forecast. For North America, the outlook ranges from 14.9 to 16 million light vehicle sales for 2022. Regularization of the value chain will not arrive until 2H22, according to the analysis.

A respite might arrive earlier with more semiconductor plants. Technology giant Bosch’s new €1 billion (US$1.2 billion) semiconductor chip plant began operating in last August. As vehicles get smarter, more semiconductors are needed. “The fact that we actually started to build this plant a couple of years ago shows that we expected the demand to go up dramatically,” said to CNBC Herald Kroeger, Member of the Bosch Management Board.

Electrification to Change the Entire Industry

Electrification is the key trend driving the automotive industry. While OEMs cannot approach it in the same way in developed and emerging markets, there is an aggressive tendency toward EVs. Between 2018 and 2028, there will be 241 light vehicle launches, according to IHS Markit.

Manufacturing of EVs will be completely different from traditional combustion engine vehicles and processes will also differ between BEVs, HEVs and PHEVs. “By 2030 we will have a very different industry, with less platforms and complexity. It will be highly electrified, but with a reduced range of products. In North America, from 2022 the tendency of combustion engine will now be negative,” said Vildozo.

Raw materials and production cycles will be the main challenges for the coming years. Governments’ decisions and regulations will also set the tone. As years go by, stringency increases. The US President Joe Biden set the goal of having 50 percent of EVs by 2030. Regulations could constantly change the approach of the industry, warned Vildozo. However, OEMs make decisions according to their strongest markets. While some automakers have a balanced global coverage, others mainly rely on 2 or 3 key markets, said Vildozo. “We have seen diverse announcements by automakers. Volkswagen targets full electrification by 2035 due to its sales footprints in China and the EU, which have strong regulations. Toyota’s electrification process is slower due to its balanced market across the world. However, it announced 15 new EVs and millions in investment,” said Vildozo.

For electrification to happen, customers, OEMs and governments are the three key players. Emerging markets, such as Mexico, will move toward a different direction, according to industry leaders in the country, since there are other priorities to attend before electrification. Combustion engine vehicles and HEVs are expected to continue having an important presence in the Mexican market.

Electrification “is progressing seriously,” said Vildozo. However, considering the industry’s low profit margins and the high costs of EVs technology, the production volume “will be relatively low initially and OEMs will continue relying on combustion engine vehicles to generate profits. Suppliers and consumers will pay the high costs of EVs,” said Vildozo.