The global automotive industry is facing a variety of challenges that may lead the global automakers to reconsider their supply chain structures. The lack of availability of semiconductors has been well established, as outlined in Panjiva's research of Feb. 4, but appears to be worsening. 

General Motors Co. has extended its shutdowns at four plants through mid-March, while Ford Motor Co. automotive division CFO Catherine O'Callaghan has said that "the information that we got from our supply base was supporting an assumption that we could lose between 10% to 20% of our planned production in the quarter."

Japan's major automakers are seeing a similar trend. Nissan Motor Co. Ltd. CEO Makoto Uchida has said the company is "revising downward our sales outlook for this fiscal year by 3.6%." Looking ahead, Nissan COO Ashwani Gupta has noted, "[W]e believe the cycle is normally six to seven months after you decide on the capacity increase," and as a result, he said, "[W]e do believe that in May or June, we should be out from this crisis."

Honda Motor Co. Ltd. has also had to cut its production output by 100,000 units out of 4.5 million for the coming year and expects that the shortage of semiconductors "will resolve in the first half this year, and it will resolve completely in the next fiscal year," according to COO Seiji Kuraishi. The company's fiscal year ends on March 31.

Toyota Motor Corp., meanwhile, appears less concerned, with CFO Kenta Kon saying, "[F]or the near term, we do not see any decrease in our production volume. Then are we secured for the mid to long term? No. We do see the risks." One strategy being pursued by Toyota to mitigate risks is communicating with tier 1 suppliers, conductor manufacturers and semiconductor makers on a daily and weekly basis "to understand the situation," Kon said.

Another strategic option is to increase inventory levels to prevent future stockouts. Daimler AG Chairman Ola Källenius has said that if "it makes sense in the future to go into more levels of safety stock, it is something we would entertain," Financial Times (London) reported, though Volkswagen AG's Porsche CEO Oliver Blume has noted that "inventory costs money, so that is the last option to take."

There has been a disparity in inventory performance recently between the major automakers that have reported results for the fourth quarter of 2020. The most efficient operator, shown by inventories as number of days' sales, was Ford with 119 days of sales in inventory though that increased by 11 days compared to a year earlier, Panjiva's analysis of S&P Capital IQ data shows. 

General Motors and Toyota, meanwhile, were catching up at 125 days and 126 days, respectively, with General Motors down by 11 days on a year earlier while Toyota decline by one day. Honda has also made progress with a 15-day reduction to 167 days while Nissan has fallen further behind with 226 days of inventories being up by 16 days.

A third strategy is nearshoring, with the passage of the United States-Mexico-Canada Agreement and extension of the application of rules of origin, increasing the attraction of being able to take the time to shift more production to Mexico. That will also reduce exposure to freight costs that have been a widespread challenge for industrial companies recently. It does not obviate risks though, as was seen earlier in the pandemic.

In the meantime, though, supply chains are unlikely to change significantly. Panjiva's data for U.S. seaborne imports shows shipments of automotive parts excluding tires have expanded steadily with growth of 14.2% year over year in the fourth quarter of 2020 being followed by a 10.3% rise in January. 

That raises the risk of elevated inventories of parts that then cannot be used due to the semiconductor shortages. Imports of parts linked to Ford and Daimler increased fastest in January at a rate of 63.2% and 37.2% year over year, respectively, though both had unusually low levels of shipments a year earlier. 

Imports linked to General Motors climbed 29.6% higher, though they had declined in the fourth quarter of 2020, suggesting a degree of normalization perhaps linked to delayed shipments resulting from port congestion on the U.S. West Coast. At the other end of the scale, Toyota's imports fell by 40.2%, indicating a continued strict approach to parts shipments.

A fourth approach is to diversify sourcing across several suppliers. That is particularly challenging in relation to the shift to electric vehicles where there are only a handful of suppliers of critical components such as batteries. Even there though, diversification is necessary. The U.S. International Trade Commission has ruled in favor of LG Chem Ltd. in an intellectual property infraction case against SK Innovation Co. Ltd. covering lithium-ion batteries. 

The ITC's ruling will limit imports by SK Innovation of some of its products for 10 years, with limited shipments allowed for Ford for four years, Volkswagen for two years and on an ongoing basis as replacement parts for Kia Corp. Talks between LG Chem and SK Innovation, Bloomberg News reported, could lead to a licensing deal. If that does not occur, all three will need to find alternative supplies.

Panjiva's data shows that U.S. seaborne imports linked to SK Innovation jumped 562% higher year over year in the fourth quarter of 2020 and have increased 11.3-fold in January. That comes against the backdrop of a 70.7% jump in total U.S. seaborne imports of lithium-ion batteries in the fourth quarter of 2020 and a 52.4% rise in January. Shipments linked to LG Chem, meanwhile, were up by 274% year over year in the fourth quarter of 2020, but have reversed in January potentially reflecting shipping bottlenecks elsewhere.

Christopher Rogers is a senior researcher at Panjiva, which is a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.