The automotive industry has been on a roller coaster over the last 18 months and the ride isn’t over. The descent into magnesium shortages is the latest hurdle.

With the help of a few industry experts, Nodifi takes a look.

Here’s a rundown on the last 18 months

Early 2020

  • As COVID strikes around the world, fear and uncertainty follow causing new and used vehicle sales to fall. International supply chains are disrupted as countries tighten borders.
  • In response, automakers scale down production and cancel parts orders which include chips (semiconductors).
    • For example, VW, China’s biggest foreign automaker, sends 3,500 employees home for weeks and closes factories.

Mid to late 2020

  • Consumer electronics see increased demand with online learning, home entertainment and working from home around the world.
  • To make up for lost orders from automakers, chip producers divert stock to tech companies seeing more demand, such as Panasonic, LG, Apple, Samsung, Acer, Dell and HP.
  • Automakers try to diversify – for example, Ford and GM retool factories from vehicles to ventilators, but not for long. 
  • Unexpectedly, vehicle demand bounces back.
  • Caught off guard, automakers scramble to ramp up production. Their semiconductor stocks quickly dwindle.
  • Suppliers, struggling to fill a backlog of orders from tech companies, receive more demand from automakers.
  • A chip shortage ensues causing automakers to once again scale back production.

Early 2021 – present

  • Other factors add further duress – for example, a Japanese factory which supplies 30% of the global market for micro-controller units used in cars, catches fire in March. It takes over 3 months to get back to normal production. Power outages in Texas also hamper American chip production.
  • Some automakers, like BMW, release new vehicles with toned-down technology (i.e., less driver assist features), in order to sell new vehicles, albeit with a lower number of chips.
  • Some manufacturers turn to other industries for supply but find minimal stock. Video game consoles are also hit with Sony’s PlayStation 5 in short supply set to continue into 2022.
  • China’s soaring coal prices and energy rationing prompt magnesium smelters to cut or shut down production. This leads to fears of an aluminum shortage, as magnesium is a key ingredient in vehicle parts.
  • GM announces a halt on production of almost all cars at its North American plants.
  • Toyota scales back production by 40% as it attempts to secure more chips. Waiting times for the new LandCruiser 300 Series are pegged at 12 months or more.
  • In Australia, Tesla wait times blow out from 1-3 weeks, to 3 months on the Model 3. Model X deliveries are expected at the end of 2022.

It’s estimated that the hit from chip shortages will cost automakers around US$210 billion in 2021 alone.

Chips explained

Chips (aka, semiconductors) are components in electronic devices that essentially act as switches. 

There are billions in use as you’re reading this sentence.

Semiconductors are controllable, in other words, they allow engineers to control the amount of electricity that passes through them.

  • A conductor – allows electricity to flow freely, e.g., copper.
  • An insulator – does not allow electricity to flow, e.g., rubber.

A semiconductor does everything in between a conductor and an insulator. The electricity flow can be dialed up or down, halted in one direction and turned on and off as required.

A simple example of semiconductors at work is in an oven. You want an oven to heat up to and maintain a desired temperature for a set time. Semiconductors tell the oven to stop heating when it reaches your set temperature and then tell it to turn back on or increase heating when the temperature falls.

In cars, semiconductors play a huge role. They turn on and off parking sensors and allow them to interact with lane departure warnings and reverse cameras. They make up entertainment systems, connectivity, engine management and monitoring and safety features, among other things.

The more sophisticated a device is, the more semiconductors are required. Transistors, which are semiconductor devices, are around 5 nanometers in size – a human hair is a massive 100,000 nanometers wide.

Factoid: over the last 60 years, processing power has increased one trillion fold. Put another way, a single iPhone could be used to guide 120,000,000 Apollo-era spacecraft to the moon – all at the same time.

Aluminium in cars

Magnesium is crucial in vehicle production and is strategically used in alloys which make up panels, transmissions, engine components, airbag housings, just to name a few.

The magnesium content in aluminium can be increased or decreased in order to shift weight distribution, strengthen or lighten components or alter production costs.

The shortages

At present, China has a near monopoly on the global production of magnesium, controlling 87% of the world’s supply. European makers are 95% reliant on China for the element.

Producing magnesium is power intensive and due to China’s energy crisis, factories have been rationed energy. China’s dependency on coal (70% of the country’s power generation) is the primary reason for the energy crisis.

Rising coal prices mean that it doesn’t make economic sense for coal power plants to keep generating electricity. Plants can avoid financial losses by claiming technical malfunctions or by minimising coal orders, both of which have happened.

Policy missteps and a lack of market interventions during the pandemic didn’t help either.

Magnesium production emits five times more carbon pollutants than steel production so ratcheting up smelters in the wake of COP26 won’t do any public relations favours.

Fears have sent prices north with magnesium in Europe trading at $US10,000-$US14,000 a tonne, up from around $US2,000 per tonne earlier this year.

Effect on vehicle prices

Vehicle prices have been on the rise since demand bounced back in 2020. A key driver in Australia was government stimulus packages like the popular Instant Asset Write-Off (IAWO) Scheme, providing eligible businesses with the opportunity to claim a deduction for the business portion of the cost of an asset.

June, 2020 saw only a 6.4% decline from June, 2019. April 2020 was 48.5% down compared to the same month in 2019.

Nodifi National Sales Manager, Alex Bodriagin, remembers the bounce back, “We saw increasing demand for vehicles triggered by subsiding COVID fears.

“The real proof was in the numbers – both the amounts people were willing to spend on vehicles and the speed at which they wanted them.”

Data from Moody’s Analytics shows used vehicle prices rose 23% from April to June in 2021.

Since the pandemic began, used vehicle prices are up around 35% with some popular utes SUVs closer to 39%.

Surprisingly, tech-heavy EVs are gaining market share, up 243.5% in October 2021 compared to the same month 2020.

According to Mr Bodriagin, late model used vehicles are attractive to buyers.

“It’s all having a knock-on effect. For example, low km utes and SUVs that are only a year or two old are seeing prices that new vehicles had in pre-COVID times.”

However, as Alex points out, there’s a silver lining.

“Some dealers are using the longer interaction time with clients to strengthen relationships and brand experience. For example, sending regular updates, demonstrations of features and generally keeping the customer excited.

“Furthermore, we’re hoping the industry will enter a consolidation phase which will mean stock and prices will settle.”

Effect on vehicle finance

Naturally, material shortages and the pandemic have affected vehicle finance too. 

Nodifi Head of Partnerships, Peter Holman, had the following to say.

“Pre-approvals are a weapon of choice at the moment. We’re seeing a lot of buyers getting pre-approved before going car shopping.

“In the past, there was less emphasis on pre-approvals as clients were able to find a vehicle and then seek finance without worrying about other buyers getting in first.

“When it comes to vehicle finance, especially utes and SUVs, it’s a case of every second counts.

“We’ve taken steps to ensure our processing times are as fast as possible.’

“Keep them experiencing the brand”

Waiting on vehicles doesn’t have to be a drag.

As Alex Bodriagan points out, buyers are still excited.

“Wait times shouldn’t take the excitement out of getting into a new car. There’s no need to focus on negatives when a prospective buyer is falling in love with an asset.

“I’m a big fan of communicating with waiting buyers – whether that be in the form of updates, emails, calls or even product demonstrations, keep them experiencing the brand, rather than simply waiting.”

Where we’re headed next

As borders open up and supply chains start to move more smoothly, strains are easing. Most experts put the chip shortage to have peaked in mid-late 2021.

Furthermore, exciting new models with amazing new technology coupled by increasing new car availability is seeing renewed enthusiasm from buyers.

Magnesium production is, for now, “ok”.

Stellantis, owner of Jeep, Alfa Romeo and Fiat, among other brands, says it does not see an imminent problem with supplies. However, many within the industry warn that China needs to pick up its pace in order to avoid problems.

GlobalFoundries, a major US-based semiconductor company, reported that its production capacity will be maxed out until the end of 2023.

Fortunately, most analysts agree that peak chip shortages are easing. However, it could take much of 2022 for the extra chips to work their way through the supply chain.

“It’s not rocket science – it’s much more difficult,” goes one semiconductor joke.

Subscribe to newsletter.

The latest asset finance news and resources.