Chip shortage could worsen amid Russia-Ukraine war, creating further headwinds for US auto sales

HOUSTON (ICIS)–US auto sales in March fell by 4.6% from February and are now at an estimated pace of 13.33m units for the year as continuing shortages of microchips, ongoing supply chain constraints and overall uncertainty about the economy amid higher energy prices since Russia’s invasion of Ukraine weigh on the industry.

• March sales fall by 4.6% from February
• Russia’s invasion of Ukraine adds to chip shortage
• US consumer demand for autos remains strong

The March report was deemed “ill” for the economy by Kevin Swift, ICIS senior economist, noting weakness across the board in sales of foreign and domestic brands as well as cars and light-duty trucks.

“Uncertainty in the economy arising from the war in Ukraine and higher energy prices and inflation are taking a toll,” Swift said.

Haig Stoddard, principal analyst-forecasting at Wards Intelligence, said that even though he expects inventories to improve by the end of the second quarter and to see sequential growth in the third and fourth quarters, the overall production forecast for 2022 has been reduced and he is now anticipating production being further below pre-pandemic levels entering 2023.

Patrick Manzi, chief economist at the National Automobile Dealers Association (NADA), said he has maintained his forecast for the year of 15.4m units but that “there are downside risks to our forecasts from ongoing supply chain issues, global conflicts and pandemic-related impacts”.

Manzi said the supply chain disruptions resulted in original equipment manufacturers (OEMs) failing to maximise plant capacity in Q4 2021, citing data from Wards Intelligence.

The average production capacity rate in North American assembly plants in Q4 2021 was 70.3%, down from 85.4% in the same quarter of the previous year.

RUSSIA-UKRAINE IMPACT ON CHIP PRODUCTION
Jincy Varghese, ICIS demand analyst, said the global auto industry was already coping with pandemic and supply chain issues when Russia invaded Ukraine.

But it could get worse as Russia is a leading producer of palladium, which is a key material used in microchip production.

Semiconductors are used to control the engine, antilock brakes, power steering, fuel monitoring system and heating and air conditioning in modern vehicles.

Automakers had been building cars without some components and parking them until they had the chips to complete the job.

Varghese said some automakers, including Ford, are planning to sell autos without certain chip-dependent parts, with the missing part to be replaced within a year.

This would free up factory and parking space from partially built vehicles.

“Companies, including Tesla, are also looking at selling cars without USB ports or other non-security-related features,” Varghese said.

DEMAND REMAINS STRONG
Demand for new autos from American consumers remains strong.

Manzi said high consumer demand and low inventories have contributed to the average incentive spending per unit reaching an all-time low, while transaction prices and monthly payments have increased.

“For the rest of the year, new-vehicle sales will be limited by the number of vehicles OEMs can build,” Manzi said.

The auto sector is important to the plastics and other chemistries because a typical vehicle contains over $3,250 of chemistry, including polypropylene (PP), along with nylon, polystyrene (PS), styrene butadiene rubber (SBR), polyurethanes and methyl methacrylate (MMA)/polymethyl methacrylate (PMMA), Swift said.

Included, for example, are antifreeze and other fluids, catalysts, plastic dashboards and other components, rubber tires and hoses, upholstery fibres, coatings and adhesives.

Virtually every component of a light vehicle, from the front bumper to the rear taillights features some chemistry.

The latest data indicate that polymer use is about 405 lb/vehicle.

Focus story by Adam Yanelli

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