BriefCASE: Navigating the Red Sea crisis, an automotive industry perspective

Geopolitical tensions and Yemen-based Houthi militant attacks in the Red Sea and Gulf of Aden are exposing the vulnerability of global trade to regional conflicts, leading to detours, delivery delays and other repercussions for the auto industry.

The global shipping industry has faced major disruptions since December 2023, due to attacks on Western cargo ships that the Houthi have alleged to have affiliations to Israel. The Houthi have instigated these disruptions, ostensibly to pressure the Israeli government to end its war against Hamas in Gaza, prompting military responses from the US and allies. Strikes on radar systems, storage facilities and launch sites in the critical Red Sea conduit for global maritime trade were initiated in the initial weeks of 2024.

Impact on original equipment manufacturers

Tesla and Volvo Cars have reportedly announced the suspension of certain production operations in Europe owing to a lack of components. For others, including Stellantis and Suzuki, production lines have been paused or disrupted, and some are resorting to air freight to mitigate delays, while adding cost. Volkswagen says it is managing the situation to minimize the impact on production. Tire manufacturer Michelin planned a production halt at four Spanish factories on Jan. 20-21, owing to delays in raw material delivery. Despite having sufficient rubber stocks, Michelin acknowledges the ongoing challenges in maintaining supplies of sea-transported raw materials.

Depending on the duration of the shipping disruption, mid- and long-term impacts for OEM and supplier bottom lines, and future strategic spending decisions, could manifest. In the current inflationary climate and with vehicle demand already facing headwinds, the OEMs may prefer to absorb the increased shipping costs at a risk to margin, rather than industry volume. While there may be budgetary headroom in the short term, any prolongation in the crisis could impact future capital expenditure projects and could be detrimental to an automaker's outlook at any stage; but right now, the industry is going through a particularly capital-intensive phase of its development: Electrification, batteries, autonomous vehicles and software-defined vehicles are all competing for any spare automaker dollars. Any automakers significantly exposed to the additional costs — particularly European OEMs currently active in battery and battery raw material sourcing arrangements — could have plans impacted with implications for future competitive positioning.

Supply chain vulnerabilities, shipping costs and delays

With a reliance on just-in-time inventory and sea-freighted electric vehicle batteries from Asia, the industry faces air, rail and road as alternatives, though air may not be feasible for bulkier and/or heavier parts. According to S&P Global Market Intelligence data, rail accounted for 4.7% of the EU's auto parts imports from Asia in 2023. It is also impacted by sanction-related issues. Despite temporary rerouting options, longer routes increase shipping costs for OEMs and reliant companies.

Shipping costs can have a substantial inflationary impact. Ships originating from Asia and rerouted 3,500 nautical miles (6,500 kilometers) around South Africa instead of taking a shortcut through the Suez Canal can also extend the journey by up to 20 days. Shipping costs have therefore skyrocketed. Rates on the Shanghai-Europe route alone rose by 8.1% to $3,103 per 20-foot container on Jan. 12, compared to the previous week, according to Reuters. Similarly, the rate for containers heading to the unaffected US West Coast surged by 43.2% to $3,974 per 40-foot container on a week-over-week basis.

The ongoing crisis also has the potential to cause congestion and delays at ports, due to unpredictable vessel timetables and equipment shortages caused by an imbalance of containers. Drewry Supply Chain Advisors estimates that more than 800 ships representing about 10 million twenty-foot equivalent units (TEUs), or approximately one-third of the world's container ship capacity, are affected by the Red Sea attacks and rerouting around the Cape of Good Hope.

Mainland China's role and industry responses

Car-carrier lines NYK, K-Line and MOL are also rerouting ships, owing to the risk of Houthi attacks. Their decision contributes to the industry's capacity crunch, affecting the availability of pure car and truck carriers (PCTCs). According to The Loadstar, the lack of PCTCs has prompted shippers to use containers for car shipments. Although there was a rise in orders for new car carrier vessels in 2023, most are not expected to be delivered until 2025. Mainland China's increasing influence in car exports and lithium battery production, along with its shift toward domestic electric car production, adds to the global supply chain challenges. BYD's move to secure its shipping capacity highlights mainland China's strategic response.

Retail impact and broader concerns

The crisis has prompted Maersk to reroute ships, with its CEO warning of severe impacts on the global economy and potential inflation. Assuming these maritime disruptions are short-lived, the recent increase in sea freight prices is expected to reverse. While the automotive sector will experience some short-term impacts, it is not anticipated to significantly change baseline economic or inflation forecasts. However, if challenges persist, with the Red Sea remaining closed and shipping costs staying high, the inflationary effects will extend beyond new car buyers.

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