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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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