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While the global chip shortage is just one facet of ongoing disruptions to supply chains, companies are seeing setbacks regardless of industry.
These disruptions illustrate how a combination of factors are working to pressure global supply chains, from factory shutdowns caused by severe weather storms to port congestion and the rising demand for consumer electronics brought on by the COVID-19 pandemic.
Local supply chain experts and company executives say these disruptions are impacting profit margins, leading companies to make up for increased costs and ultimately affecting the price that customers pay for goods and services.
However, even industry-specific disruptions like the global chip shortage are leading to unexpected outcomes for manufacturers and suppliers in the automotive industry’s supply chains.
Most automotive OEMs were hit hardest by the global chip shortage in the first quarter of 2021. Estimates suggest global automotive manufacturers will have produced 672,000 fewer vehicles in Q1 due to low supply of chips, according to research firm IHS Markit.
Yet, Milwaukee-based HellermannTyton, a global manufacturer and distributor of cable management products for vehicles, saw increased demand during the quarter, said Bruce Laabs, HellermannTyton director of market development in North America.
Although vehicle production volumes were down, HellermannTyton’s tier one customers were using the first quarter to recover low stocking levels as they continued to build harnesses and other subcomponent assemblies that go directly to automotive OEMs.
“It was a strange quarter for us where we were hearing all of this news and trying to somehow prepare for another slowdown or impacted revenue and sales, and we didn’t,” Laabs said. “In fact, we saw record demand in the quarter for our products.”
Before the chip shortage, automotive manufacturers were on pace to recover from last year’s low production volumes caused by the coronavirus pandemic. In fact, the industry was projected to recover to about 16.25 million vehicles or 25% gains over 2020, Laabs said.
Even as those production estimates have dropped to 15 million in June, automotive OEMs are telling HellermannTyton and other manufacturers and suppliers to prepare for record production volumes during the second half of the year.
“They’re all reporting that when the semiconductor shortage is over, they’re going to do whatever they can to make up any of this lost volume,” Laabs said. “We are starting to see OEM forecasts and customer forecasts already recovering even though we’re not even through Q2.”
Despite uncertainty around chip supplies and the ongoing impact on vehicle production, automotive OEMs like Ford Motor Co. are optimistic as high consumer demand and tight supplies have kept pricing strong.
Ford has reported that the semiconductor industry is recovering faster than it expected; the manufacturer also expects its adjusted earnings for the second quarter to be “significantly” better than the $1.9 billion loss it reported in the second quarter of 2020.
“To hear this coming from Ford that Q3 and Q4 will be strong recovery and the semiconductor shortage is starting to wane is good news for us,” Laabs said. “It’s not just Ford saying this; it’s General Motors and Stellantis.”
Reading between the lines of its customers, HellermannTyton believes the automotive industry will see higher demand and recovery, but that doesn’t necessarily mean full recovery, Laabs said. Still, HellermannTyton is preparing for higher production volumes during the second half of the year and has increased inventory levels to meet anticipated demand, he added.
“What we’re thinking will happen is that lead times will reduce, cost will reduce, but we think it’s going to be a little bit more of a bullwhip effect,” Laabs said. “It’ll improve and then get a little worse until it finally stabilizes at some point.”
Stability in global supply chains may not arrive for months and in some cases years depending on the industry, said Bill Byrkit, a consultant with Byrkit Point Supply Chain Advisors. Several companies are mapping their supply chains and establishing second sources as they develop redundancy and flexibility, but that takes time, he said.
In the meantime, Byrkit expects logistics and transportation disruptions to continue over the next six months as well as inflationary factors depending on the industry. That’s because to meet customer demand, companies have added capacity, brought on extra labor and are paying a premium for transportation.
“People are adding more cost to the supply chain to improve their capabilities and capacity,” Byrkit said. “Positioning for next year, they’re going to look to pass a price increase on to their customers.”
Companies are already passing increased transportation and logistics costs onto their customers, and Milwaukee-based A.O. Smith is just one example. In 2021 alone, A.O. Smith expects to increase prices on select residential and commercial water heaters by as much as 36%.
The company announced four different price increases this year citing rising costs in transportation, materials and steel, according to a U.S. Securities and Exchange Commission filing.
However, Byrkit says that true commodities and raw materials will find their equilibrium and lumber is just one example. Lumber, which peaked in early May at $1,650.50 per thousand board feet, was down to $737.40 by the end of June.
Supply and demand will take time to rebalance, given that supply chain disruptions as well as raw material and part shortages are expected to continue into 2022 and 2023, said Marko Bastl, director of the Center for Supply Chain Management at Marquette University.
“I think we are dealing with transitory inflation effect,” Bastl said. “Although this is pushing higher commodity prices, I believe on its own, it is very unlikely to be enough to introduce a substantial longer-term inflation.”