The supply of parts has become the biggest roadblock to the automotive aftermarket, and to the collision repair sector. Everyone is frustrated – from manufacturers who see the lost revenue piling up, bleeding red ink everywhere, to the incredible delays that staff have to report to customers. However, in as little as 12 months the situation could change completely.
From chips to clutches
Vehicle manufacturers and their suppliers work on schedules. This is tied to cashflow, so major expenditures on tooling is planned. The greater the volume of parts, the greater these investments are – tooling will only manufacture a finite number of parts, so needs to be changed periodically. Large investments are like super tankers – stopping them or changing direction is a long slow and expensive process.
Consider what most governments have done since March 2020. Daily broadcasts, policy changed in a matter of hours, colleagues’ truck down by the “ping-demic” or, far worse, from illness. Immense expensive investment does not sit well with the chaos, with the result that many things have been put on ice, or, should the company reach a perilous state, have been cancelled.
The global supply network is affected by each country. So even if there is no issue in the region manufacturing is taking place, restrictions in the destination markets cause product to be backed up. Block the Suez Canal for two weeks? Watch the just-in-time delivery system go into melt-down right around the world.
Printing cash and widespread distribution that cash has caused a unique bubble. Some, and by no means all, members of the public seem to be awash with cash, buying all sorts of things. Second-hand car prices have taken a different trajectory as supply fails to meet demand, yet there is right now underlying inflation – not just to crazy gas and electricity prices.
Coping with the strain
The current trend has produced the lowest new vehicle sales figures for decades, and thanks to the simultaneous changes to taxation, especially benefit-in-kind, any exec with a company car has already or is about to get hold of an EV. The two paths have produced events such as Tesla Model 3 out-selling volume vehicles. Ford retaining just one place in the top 10 and more.
The issue is most new vehicles builds have had some sort of disruption
Part of that disruption was caused by two events close to the start of the lockdowns – a power outage in Texas causing weeks of lost chipset production, and a fire at a major chipset supplier which effectively took that production volume out. The issue was the type of chips. The automotive sector is used to using the type of processors that are also widely used in consumer electronics, whereas the more advanced electrical devices (phones, computers and Tesla) don’t. The chip production outage primarily hit the type of chips used by vehicle manufacturers, whereas the other customers survived. Why? The outage was compounded by many vehicle manufacturers cancelling supply contracts due to lockdowns, which meant when they approached suppliers for chips the production had already been allocated to other sectors.
Some vehicle manufacturers have sought to compensate customers who ordered more advanced TFT-based instrument packs in favour of conventional packs, to enable deliveries to continue. Other manufacturers have taken to shipping almost complete vehicles and retrofitting parts from other sources close to the customer’s destination. Naturally this raises the question; Are these really “new’ vehicles?
Boom to bust
This raises the prospect of pent-up production finally being released to market later in 2022, as the parts supply constraints are removed. This could occur the same time as inflation peaks. The effect on second-hand vehicles is not clear, but does not follow that residuals will remain as strong as they are okay.
The automotive industry business model is based around a vehicle sold at one price, then decaying towards “uneconomic” over a 10-15-year period. We have had reversals before, where young second-hand cars cost more than new ones, but each time the situations causes a nett decline in values right across the board. Long-term, this is death by a thousand cuts. While sparkly electric vehicles command the attention of newspapers and policy makers, globally for every single new EV there are nearly 80 ICE-powered vehicles built. In the UK, unless HM Government is going to give us yet more of our own cash, the model mix has become even more fragmented since new vehicle sales ranges between 1.6 million and 2.7 million units per year. That gives our sector less of each make/model combination than ever before.
This could point to traditional insurance industry models used for economics write-offs allowing even greater number of vehicles to go into the salvage process. Of course, insurers will point to their FCA rules, the law and unlimited liability as the reason for an economic write off. This is all true.
The big questions
Should laws be changed to limit a motor insurer’s liability? Should insurers consider a form of insurance policy to be paid for by the policy holder, to allow otherwise unpalatable repairs which are fundamentally safe to go ahead? For the consumer the choice right now is to wait up to three months for parts to get going with parts from other sources such as Aft’s, third party suppliers and so on (that is, not parts harvested at the dead of night from an unsuspecting vehicle).
The reality is motor insurers already take out all kinds of insurance to manage their liabilities. Most underwriters will offer policies for a fee. This is not impossible to manage, but does it cause major issues with legal demands that insurers must meet?
From the start of March 2020, the major issue was the economy. As we hopefully move on from the effect of a virus to a healthier future, we as a sector need to prepare for a rough ride ahead as the economy starts to grow with underlying inflation. That requires what body shops have always been good at – being flexible, imaginative, and fast moving.
By Andrew Marsh