The pandemic is causing acute supply shortages across the globe in a wide number of industries. One of the dearer products is semiconductors (or electronic chips). Chips are like brains for electronic products. Demand for electronics (such as phones, laptops, gaming consoles etc.) have increased as people of all ages have begun to study or work from home. There has been a shortage in supply due to lockdowns globally. Now the demand-supply gap is at a level which will take its sweet time to normalize.
Globally, the dent is more visible in the automobile sector. Cars are getting smarter day by day and without its Electronic Control Unit (ECU), a car is just a display toy. ECU supplies are adversely affected. Several automobiles have temporarily closed their plants around the world, including in the US and UK. Some are making crippled units (cars are assembled without ECUs) while others are making do with a lot of difficulty. But the question is for how long?
Pakistani automobile industry is not insulated from this global phenomenon. Several auto companies feel the brunt at this moment, delaying deliveries. Some have even stopped taking bookings for new units. The ‘on money’ for instant delivery may jack up further.
Supply shocks leading to shortages have negative spillovers. One South Korean car manufacturer is trying to manage demand shipping ECUs by air. Smaller players are paying steep premiums for CKD supplies shipped through the sea routes as they do not have long-term contracts. Even car parts manufacturers are facing higher costs for parts they import.
This means that gross margins for car-makers will be squeezed. The competition is not letting them increase their prices. The recent currency appreciation has played in their favour to compensate for higher shipping and parts cost. The situation is likely to get worse before it can get better. The Covid second and third waves are not helping either. The adverse supply chain dynamics in Taiwan, world’s biggest semiconductor manufacturer, are making the equation more complex.
In automobiles, just in time (JIT) delivery is a science that has helped automakers keep their costs at optimal levels. But when such shortages occur, JIT becomes a double-edged sword. There were incidents of natural calamity in the last decade where Japanese car manufacturers were badly hit.
In 2011, Thailand floods resulted in an extremely low production for Honda in Pakistan from November 2011 to March 2012. Majority of parts supplied to Honda Pakistan are from Thailand. When the factories in Thailand were forced to shut down, overall region’s assembling plummeted. Similarly, Fukushima nuclear disaster in Japan impacted the global supply chain of Toyota.
Those were natural calamities affecting certain pockets. Covid-19 is causing disruptions across the globe. Nonetheless, Japanese learned their lesson and have moved away from JIT in certain parts or came up with alternate strategies in the case of catastrophes.
That is why productions of Japanese players in Pakistan are least affected. The other reason for better Japanese supply is that parent companies have control over local firms, and thus are ensuring supply. Moreover, these players have been present in Pakistan for over three decades – thus the strength of relationship with local players is much deeper. Toyota (Indus Motors) is confident that its supply chain will remain unaffected – so far there is no problem. However, Honda has started feeling the heat. Its production is down in April.
South Korean assemblers are contract manufacturers. Pakistan is a new market and local players have just started operations. They are not on the radar. Hyundai is badly hit in Pakistan. They have stopped taking booking for their introductory product - Tucson. Crippled units in the factory are waiting for ECUs. For Kia, the supply of ECUs by air has let them manage at a better level; but now their deliveries are also delayed. The delay is likely to worsen in the next few months.
Chinese are not insulated from this predicament either. MG relies on direct completely build units (CBUs) from China. The chips are supplied from Europe to China. The chain breaks on that route. The delivery in Pakistan is delayed by 30-45 days.
Players in Pakistan are confident that supply will get better by the next quarter. India is a big market and an extremely devastating Covid situation may lower automobile production in that country due to suppressed demand. That may bode well for Pakistan to get the supplies originally kept for India.
However, the Covid situation is fluid. The supply chain disruptions can go further south. World over, semiconductors suppliers have announced expansions; but these will take 1-2 years to come online. Droughts in Taiwan are impacting semiconductors production as the product is highly water intensive.
So far, the mobile phone industry is not as impacted (though big global players have delayed their new model launch). None of Pakistan’s cellphone assembler is facing problems yet. But it’s a matter of time before other industries will also get hit.
The automobile supply chain may take longer to normalize than what local players have projected. This may impact production and lower the LSM growth that has been witnessed over the past few months. Consumers who have booked cars may have to demonstrate patience. And those who are planning to book cars must keep these expected delays in mind.
Copyright Business Recorder, 2021