Automotive Supply Chain Risk Digest #358

December 15 - 21, 2023, by Elm Analytics

Dec 22, 2023

Closing

Hyundai is closing two engine parts plants in Ulsan, South Korea, to focus on EV production. Both facilities have been operational since 1991 and are anticipated to close in January and October.

Industry Directions

Volkswagen Group plans to save $11B by 2026 to improve the VW brand's profitability. The plan includes faster development and production, reduced staff costs, and more efficient procurement, aiming to boost the profit margin from 3.4% to 6.5%.

Expected savings include:

$352M annually in procurement
$275M in after-sales optimization
$220M from improved production times
$440M / year by reducing test vehicles and increasing digital testing
$880M by canceling an R&D site in Wolfsburg

VW's cost-cutting measures are part of the broader trend of automakers streamlining operations to remain competitive, particularly as the industry shifts towards electric vehicles and faces new market challenges.

S&P Mobility:

Labor

Tesla plans to raise the pay of hourly workers at its Nevada Gigafactory in early January 2024. The pay increases, ranging from $2 to $8.30 per hour, represent a 10%+ raise for most hourly workers.

This move may be aimed at dissuading workers from showing interest in forming a union and seeking collective bargaining agreements in Nevada. The UAW intends to target Tesla and other non-unionized automakers in the US, following successful negotiations with the Detroit 3 earlier in the year.

Litigation

Michelle Robinson, head of the Michigan Minority Supplier Development Council, testified in Wayne County Circuit Court regarding the council's decision to revoke the minority business enterprise status $ of Piston Group, the country's largest Black-owned automotive supplier.

This revocation in 2021 led to the Piston Group suing the council to regain certification. The council argues that Vinnie Johnson, Piston Group's founder and majority owner, lacks active day-to-day management of the company. The trial, presided over by Judge Annette Berry, scrutinizes whether Piston Group's companies qualify as minority business enterprises.

The outcome could significantly impact automakers like Stellantis NV, Ford, and General Motors, who prioritize minority-certified suppliers. The case has strained the council's finances, prompting the National Minority Supplier Development Council to consider taking over regional certification duties. The case's focus on defining and enforcing minority business enterprise status highlights the complexity and importance of such certifications in the automotive industry.

Mergers, Ventures, Acquisitions

Panasonic has decided not to build an EV battery plant in Pryor, Oklahoma, despite the state's offer of a $698M incentive package and $145M funding for site improvements.

The decision, announced by Panasonic spokesperson Alison Klooster, follows an exploratory agreement with Oklahoma in April 2023. Klooster did not specify the reasons for the decision but stated that it would not impact its electric vehicle battery operations in Kansas or Nevada.

Tesla's planned car factory in Santa Catarina, Nuevo Leon, Mexico, faces delays and uncertainty. Initially expected to produce cheaper next-generation vehicles, construction has been hindered by global economic concerns, permitting issues, and a need for additional infrastructure.

To support the project, the Nuevo Leon state government approved $153M in incentives, and Tesla received a land-use permit last week. However, several more permits and infrastructure development are needed.

Once hailed as a significant example of nearshoring, the factory is uncertain of opening even by 2025. Tesla CEO Elon Musk expressed reluctance to proceed at full speed, citing economic conditions. Residents remain hopeful for the economic benefits the plant could bring, akin to Kia's impact in the region.

China's Great Wall Motors is also exploring building an EV production plant in Nuevo León, Mexico.

Opening

LG Chem has begun constructing its battery factory in Clarksville, Tennessee, which will become the largest in the US. The South Korean battery cell manufacturer has revised its initial investment from $3.2B to $1.6B, halving the plant's annual capacity to 60k tonnes, sufficient for batteries for approximately 600k EVs.

The factory's initial production of NCMA cathode materials has been pushed back from mid-2025 to 2026. LG Chem has secured supply contracts with General Motors and Toyota, and its location in Tennessee was chosen for its strategic advantages and incentives under the IRA.

Recalls

Honda Motor's American unit recalled 4.5M vehicles worldwide over risks of fuel pump failure. The recall includes 2.5M vehicles in the US and comes after the automaker recalled 628k vehicles in 2021 and 136k in 2020 for the same issue.

The announcement was made a day after Honda recalled about 106k CR-V hybrid vehicles due to the risk of fire or injury in a crash caused by an overheated battery cable or short circuit.

Toyota Motor North America announced a global recall of 1.1M Toyota and Lexus vehicles from the 2020-22 model years due to defective Occupant Classification System sensors. The malfunctioning sensors in the front passenger seat may cause a short circuit, preventing correct airbag deployment in a crash and increasing injury risk.

Automakers and airbag manufacturers ARC and Delphi are challenging NHTSA's analysis and proposal to recall 52M airbag inflators. NHTSA argues these inflators, used in vehicles from 2000→2018, may rupture and send metal fragments flying, citing one US fatality and seven injuries. GM, which recalled 1M ARC inflators last March after an incident, labels the proposed recall as excessive.

Delphi and ARC, responsible for manufacturing the inflators, also oppose the recall, questioning the evidence of a systemic defect. If the recall moves forward, it could be the second-largest in US history, impacting up to 15% of the 300M registered vehicles.

Regulation

The Canadian government has released its zero-emissions vehicle (ZEV) sales mandate, requiring automakers to meet annual regulated sales targets starting in 2026, with at least 20% of new light-duty vehicles being ZEVs, reaching 100% by 2035. Automakers will earn credits for ZEV sales and can buy credits or invest in EV infrastructure to meet shortfalls.

The mandate aims to increase EV adoption despite concerns about high costs and insufficient charging infrastructure. The government has committed to investing in the Incentive for Zero Emissions Vehicle Program, offering buyers up to CAD 5k in incentives.

Risk Analytics

Initially eager to invest in EV and hydrogen contracts, automotive suppliers are now seeking protection $ against uncertain market demands and production delays. Ford and General Motors have recently reduced production targets, impacting suppliers who have made significant investments in EV programs.

"You have a fairly fragile base that you asked to invest in EVs alongside of you as an OEM, and then you tell them several quarters later, 'Oh, by the way, thanks for coming with us, but the ride's not gonna start for another year.'"
- Steve Wybo, Riveron

Suppliers like Forvia and Aptiv are pushing for contract terms that safeguard against lower volumes, while others like Lear are cautious with new investments. Industry experts indicate that the risk of investing in new technologies is high, and suppliers are advocating for a more balanced approach to risk-sharing with automakers.

The automotive industry's rapid shift to EV production has led to an overestimation of market demand, resulting in significant adjustments to production plans.

Ford's recent halving of its F-150 Lightning production targets exemplifies the volatility and unpredictability of the EV market, impacting not only automakers but also their supply chains, with potential long-term effects on the automotive industry's transition to electric vehicles.

This situation poses challenges for suppliers $ who have invested in capacity based on initial, more optimistic forecasts.

"If you invest for a large volume of tooling, it's not going to pay itself off quickly," he said. "If the suppliers were planning on every number the manufacturers gave them, they're over-capacitized now and have to figure out what to do with these plants, tooling and people."
- Sam Fiorani, AutoForecast Solutions

Shutdown

Toyota Motor faced a significant setback as its subsidiary Daihatsu Motor halted all vehicle shipments due to safety inspection irregularities, impacting 64 models.

This halt was triggered by an investigation revealing rigged side-collision safety tests for 88k small cars. Daihatsu's issues have drawn government criticism, with potential administrative penalties pending.

The impact on Daihatsu's extensive supply chain, involving over 8k companies, is notable. Analysts estimate a one-month suspension of production, for example, would equal 120k vehicles and translate to a revenue reduction of $1.6B.

General Motors' Factory Zero EV plant in Detroit resumed production Wednesday after a fire on Tuesday shut down operations. The fire may have been started by a forklift puncturing a container of battery materials, but the cause is still being investigated.

Supply Chain

Border closures can significantly disrupt supply chain operations, and having alternative transportation options and contingency plans in place is crucial for shippers to maintain the flow of goods.

The recent closure of vital railroad bridge crossings at Eagle Pass and El Paso, Texas, by US Customs and Border Protection has led shippers and freight brokerages to consider alternative transportation methods and routes to minimize delivery disruptions.

Brokers are assisting customers in diverting freight to alternative crossings, shifting loads onto trucks or planes, and making contingency plans to address border closures more effectively in the future.

Automotive Supply Chain Risk Digest