It's the question on every car buyer's mind: Why is the new car I paid a reservation for taking so long?
And we're not just talking here in our 7,107 (or 7,641) islands. This is a global issue. Everywhere, car buyers are experiencing long waiting times for a brand new vehicle, prompting a rise in prices with second-hand vehicles to fill the demand and dealers charging extra markups on whatever new cars they have.
But is it just simply supply not meeting the demand? This isn't something we in the import-dependent Philippines are alien to; after all, when a popular car is launched, customers flock to dealerships to reserve and are “persuaded” into transactions that aren't exactly in their favor to get a unit they want.
That's actually the key phrase here: unit allocation. But what's happening now is on an entirely new level. It's a perfect storm that is impacting the auto industry.
So what gives? Let's take a look at what's going on.
1. Electronic Parts
We like to think of cars as rugged and durable tools of mobility, but these have become as much like computers as they are machines. Customers demand more safety, efficiency, power, features, connectivity, and so on and so forth. And all these features mean more electronics. Imagine that you have X-ray vision and use your power to take a look at any new vehicle nearby... just the vehicle, not the people. That's naughty.
What you'll see is a car that has become as complicated as a modern personal computer. Actually, it's probably far more sophisticated if we go by the collection of sensors, switches, computer boxes, and control processes that go on in a package that needs to be durable, weatherproof, dependable, and safe.
All this means that car manufacturing is vulnerable to disruption to the supply chain. While people were busy buying masks, alcohol (including the drinking kind), and stocking up on toilet paper (for whatever reasons) at the start of the pandemic in 2020, there was already a looming issue with electronics. Semiconductors, specifically.
Various sources have already spoken about semiconductor supply issues as early as 2017; a direct result of consumer demand for all kinds of electronic devices like smartphones, smart TVs, CCTV cameras, tablets so on and so forth. Think of the great demand that already exists in the fast-moving consumer tech industry, the needs of the medical sector for life-saving electronics and tools, and then toss in the demands of the global auto industry as well as the effects of the pandemic, and suddenly it becomes clear.
Oh and don't forget the transformation of the auto industry towards electric drive (be it EV, mild or full hybrid) after the general allergy towards diesel and you can imagine that the supply chain gets even more strained. EV batteries are in extremely high demand right now as automakers revamp their lineups for the future.
2. Raw Materials
There also exists a general shortage in basic parts; the kind that we use for maintenance. Think of things as basic as filters, oil, and so on and so forth. That means longer wait times for these basic maintenance parts for your current car.
While that isn't exactly indicative of manufacturing, it is a symptom of another issue: problems with the raw material supply chain. Think things like aluminum, steel, rubber, plastics, paper, copper, and the like are being affected by a multitude of factors. Any shortage or supply disruption of any kind only serves to complicate things for the auto industry's efforts to produce the cars you so desire.
3. Shipping Issues
A lot of the things so far are about the supply chain crisis with regard to parts and materials, but there have also been a lot of issues with regard to global shipping. It's like a vicious and self-feeding cycle; not only is the manufacturing of components affected, but actually getting the components to where it needs to get is also taking a big hit.
In 2021 we saw a bit of that when a container ship blocked the Suez Canal for 6 days. Imagine the kind of supply disruption that it caused on anything that needs to transit the canal. Imagine EDSA traffic on a rainy payday Friday with a 3-day sale at SM Megamall and you'll know what I mean. But this time we're talking about big ships and the world economy.
But perhaps the major one right now is what's going on in Shanghai. Remember those harsh lockdowns they have endured or are still enduring? Well, that's effectively shutting down the world's largest port, delaying everything in the process.
That one actually has a direct impact on units bound for the Philippines. Recently I was able to get an internal document from one automaker in the Philippines, and it clearly cited the Shanghai lockdowns as a direct cause for the restriction of their vehicle supplies of vans, MPVs, and pick-up trucks.
4. The War In Europe
The real curve ball, however, is the invasion of Ukraine by Russia.
Ukraine is now valiantly fighting off the invasion with all kinds of international support that falls short of sparking World War III. The war is now in its fifth month, and there seem to be no signs of an endgame yet.
Some may be wondering what the war in Eastern Europe has to do with the global auto industry apart from the pullout of many automakers from Russia and the impact on gas prices. That's a fair point to ask. Basically, Ukraine produces a lot of critical things needed for auto manufacturing. On the components side, they are one of the biggest manufacturers of wiring harnesses for cars in Europe. But what's really critical is what Ukraine does on the raw materials side.
Remember that steel plant in Mariupol that held out for a long time against the Russians? That's actually indicative of Ukraine's status as one of the biggest steel producers in the world. But the biggest impact is perhaps the neon gas.
As we learned a few months ago, two Ukrainian companies are responsible for about half of the world's supply of neon gas. This is a critical requirement for the production of electronics. Refer to number 1.
5. The Pandemic vs. Just In Time
The major trigger was really the global COVID-19 pandemic. Like you, I'm sick and tired of the word pandemic, but it's still here. More importantly, we are still feeling the effects of it in the industry because of the work stoppages it caused. What it did was expose the one major weakness of a production system called JIT: just in time.
JIT is a system pioneered by Toyota where they have streamlined the production process. Parts arrive at the factory from different suppliers at the right time, then the parts are distributed to all the workers at the moment it needs to be installed, and the finished vehicle is then immediately sent out onto a ship or to dealerships as soon as possible.
That's a very simplified explanation, but the net effect is minimal idle time and stocking costs where parts or cars have to be stored in a warehouse or a stockyard. Toyota calls its version the Toyota Production System, but this has been implemented by automakers in Japan and all around the world with their own twist on things. Mazda has a similar system but they can actually build different car models on the same line; they have ensured that the parts do not get mixed up when they arrive at a workstation for specific models.
This system, as we are now learning, is very sensitive to disruptions. The complex system depends on the timely delivery to and reception of things where they are needed. Maybe one or two supplies of parts delayed won't affect the finely tuned system, but the pandemic was like a sledgehammer that smashed a lot of different aspects of that web.
Think of it like like a philharmonic orchestra. A good conductor can find a way to recover quickly if the cellist or the tubist gets out of sync, but if instrument sections go down the recovery will take much longer.
Eventually (and hopefully) everything will be stabilized again, but there are a lot of lessons to be learned here. But until the supply chain gets sorted out, expect to wait longer for your new car. You're not alone.