How Global Automotives are Tackling the High Price, Low Volume Challenge

The global automobile industry is facing a stormy ride. Supply shortages, triggered by the pandemic, have disrupted production lines, leading to low inventory. Simultaneously, commodity prices have started soaring, pushing vehicle costs to unprecedented heights. The end consumers are facing the effect of both; rising automobile prices, and rising fuel costs.  

In this blog, we explore why there is a sudden rise in automobile costs, and analyse its impact on various parties; the suppliers, manufacturers, dealers, and end consumers.  

Navigating Turbulent Roads 

One could say that the root cause of low inventory and high prices is semiconductor shortage and inflationary input costs. As we’ve seen in our earlier blogs, the scarcity of semiconductors, essential for features like navigation and infotainment, has disrupted production lines. The reasons are many.

• As more people turned to electronics during the pandemic, chip demand surged, creating a backlog. 
• The pandemic disrupted supply chains globally. From raw materials to finished vehicles, delays became commonplace. This affected the timely delivery of critical components like semiconductors.  
• Skilled labor shortages in manufacturing plants contributed to slowed down production as well.
• Many semiconductors are transported by air, but transport costs surged, while available shipping volume dropped.  
• OEMs (original equipment manufacturers) have struggled to obtain critical vehicle components like wiring harnesses. Reduced production volumes added uncertainty and decreased demand for semiconductor-based components.  
• Lastly, geopolitical tensions like the Russia-Ukraine war also contributed to this shortage. 

When it comes to input costs, we well know that the cost of key components like aluminum, precious metals and crude oil have risen significantly. Aluminum, for instance, accounts for 10-15% of the total raw material cost, and it has become 20% costlier in recent times. In fact, it’s trading at record high today. Similarly, crude oil prices have crossed USD 100 a barrel for the first time in seven years, further adding to input costs.  

Both these factors in turn affected parties across the industry. For manufacturers, semiconductor shortages have disrupted production lines, leading to halted assembly and delayed deliveries. Some manufacturers have also had to deal with intricate supply chains where any disruptions could affect their ability to meet the demand. Lastly, higher input costs have toppled the balance between manufacturing and profitability.  

Labourers have faced uncertainties due to production fluctuations. They’ve experienced layoffs and reduced hours, which in turn have affected their livelihoods. To cope with labor shortages, manufacturers have started exploring automation solutions to maintain productivity.

Dealerships have also had to face a significant challenge due to low inventory. With fewer cars available for sale, they are struggling to meet customer demand. Limited supply also means dealerships can’t negotiate as aggressively with manufacturers, and this impacts their profit margins. 

For consumers, they’ve had to deal with longer wait times and lesser options. They’ve also had to bear the brunt of higher vehicle costs, making it harder for them to afford their desired models. This has left them to postpone purchasing decisions or turn to used cars, the prices of which have also started soaring because of increasing demand. 

Given these challenges across all segments of the industry, what can we expect in the future? 

Automotives have a history of resilience

In 2024, the new vehicle market is expected to experience marginal growth, reaching approximately two million units—an annual increase of around five percent. Despite soft demand, manufacturers and supply chain businesses are set to increase production. Original equipment manufacturers (OEMs) aim to operate their factories at 80-85% capacity to maximise profits. However, current production levels remain below this crucial utilisation level, according to US data. 

On the other hand, the used car market is anticipated to thrive due to the lingering effects of the pandemic, resulting in a shortage of new vehicles. Despite the influx of new vehicles into the market, it is predicted that used car prices won’t be significantly affected. Used car sales are expected to reach 7.3 million units in 2024, compared to an estimated 7.05 million units in 2023, still below the 2019 sales figure of 7.9 million vehicles. 

Manufacturing challenges persist as OEMs globally strive to meet factory capacity. The shift towards Battery Electric Vehicles (BEVs) will continue, shaping the automotive landscape. Despite a decrease in the total car market, BEV (battery electric vehicle) and PHEV (plug-in hybrid electric vehicles) sales increased by 137% in 2020. Europe now leads as the largest market for new plug-in electric vehicles, surpassing China. 

Challenges notwithstanding, the automotive industry has a history of resilience, having weathered recessions, global disruptions, and the impact of COVID-19. Adaptability and strategic planning will be crucial as the industry evolves. 

Additionally, attention should be given to the growing influence of Chinese OEMs in the global automotive market. Dealerships are expected to adapt to changing dynamics, focusing on balancing inventory and aligning with evolving consumer preferences. Despite the challenges, opportunities for growth exist in the automotive sector, highlighting the industry’s ability to overcome obstacles through adaptability and strategic planning. 

A Merit expert says, “The global automobile industry, grappling with semiconductor shortages, inflationary input costs, and geopolitical tensions, faces a turbulent journey. As manufacturers, suppliers, dealers, and consumers navigate the challenges of low inventory and soaring prices, resilience, adaptability, and strategic planning will be crucial for the industry’s evolution and growth amidst uncertainties.” 

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Key Takeaways 

Root Causes of Rising Automobile Costs: Semiconductor shortages and inflationary input costs, including increased prices of key components like aluminum and crude oil, can be the primary reasons for the surge in automobile costs. 

Supply Chain Disruptions and Labor Shortages: Global disruptions caused by the pandemic, skilled labor shortages in manufacturing plants, and geopolitical tensions have led to delays in the timely delivery of critical components like semiconductors. Laborers have faced uncertainties, experiencing layoffs and reduced hours, prompting manufacturers to explore automation solutions. 

Challenges Across the Industry: Manufacturers have grappled with halted assembly lines, delayed deliveries, and the delicate balance between production and profitability. Dealerships are facing significant challenges due to low inventory, impacting their ability to meet customer demand and negotiate with manufacturers. Consumers are dealing with longer wait times, limited options, and higher vehicle costs, prompting some to postpone purchases or turn to the used car market. 

Future Outlook: Despite the current challenges, the automotive industry is expected to experience marginal growth in the new vehicle market in 2024. Original equipment manufacturers (OEMs) are set to increase production, aiming to operate at 80-85% capacity to maximise profits. The used car market is anticipated to thrive, driven by the lingering effects of the pandemic and a shortage of new vehicles. The shift towards Battery Electric Vehicles (BEVs) is expected to continue, with Europe leading as the largest market for new plug-in electric vehicles. 

Resilience and Opportunities for Growth: The automotive industry has had a history of being resilient, with its ability to weather recessions, global disruptions, and the impact of COVID-19. At this time, it’s important for automakers to focus on adaptability and strategic planning as the industry evolves. Additionally, they need to draw attention on the growing influence of Chinese OEMs in the global automotive market, and identify opportunities for growth despite the challenges faced by the sector.