By Ryan Mandell – Report from Mitchell International
In the immediate wake of the COVID-19 pandemic, many questions arose surrounding the continued viability of the parts supply chain. We soon saw a strong resiliency in the availability of parts across all channels with relatively limited disruptions reported in 2020. However, the aftershocks of COVID may have greater impact on the global supply chain than the initial impact. Moreover, while many stakeholders throughout the industry will find challenges in the months and years ahead, the trends currently developing in several key areas may very likely prove to be a strong opportunity for automotive recyclers to flourish.
Ramifications from Shut Downs
In the spring of 2020, many companies either significantly reduced or completely shut down their manufacturing operations in an effort to protect their employees. Beginning in May 2020, many had begun to reopen a portion of their facilities but some still have not returned to full-scale production.
The global semiconductor (also referred to as microprocessors) manufacturing industry was particularly hard hit as supply fell dramatically due to production stoppages. This occurred at the same time as demand began to increase rapidly as workers around the world found themselves locked down and working from home indefinitely, with greater needs for business efficiency products and consumer electronics, both of which are heavily reliant on semiconductors.
Vehicle manufacturers now face mounting pressure from the worldwide shortage of semiconductors that is currently affecting new vehicle supply and has the potential to threaten the availability of certain part types that are reliant on such components, such as ADAS sensors, control modules, cameras, and a variety of ABS and power steering parts. The average new model year vehicle requires over 100 semiconductors, and new electric vehicles even more than that. Large tech companies like Apple and Samsung, however, make up the lion’s share of the market for microprocessors causing automakers to fall further down the list when it comes to prioritizing order fulfillment.
New vehicle assembly is currently the hardest hit segment of the industry. Ford,
for example, is reporting production stoppages across the United States and estimates the company could potentially suffer 1.1 million units of lost production in 2021. The lack of new vehicle availability is driving used vehicle prices atypically higher, with Manheim reporting an increase in the Used Vehicle Value Index of 26.29% in March 2021 compared to March 2020. To put this in perspective, the growth in the same index between March 2018 and March 2020 was 8.49%.
Opportunity Inside Shortages
The effect of this global semiconductor supply shortage on auto recyclers is twofold: 1) a reduction in supply of new, semiconductor reliant parts means a potential increase in demand for used components that can be procured more readily, and
2) the increase in demand for used vehicles means more vehicles being driven that qualify for the use of recycled parts in the course of a collision repair, as many insurance carriers prohibit the use of recycled parts on vehicles of a certain age and under a certain mileage. While certainly an increase in used vehicle values means an increase in the cost of salvage, there remains opportunities for recyclers to capitalize as well.
Upside of Supply Chain Issues
As noted, the widespread lockdowns and shift to remote work has meant an increased demand for consumer electronics (primarily acquired via e-commerce) and hardware required to maintain enterprise levels of productivity in an off-site environment.
The bulk of these products come from mainland China and the increase in goods coming across the pond has meant, in many instances, severely congested seaports on the west coast of the United States, particularly in Southern California. The port of Los Angeles, for example, saw a 94% increase in import traffic over the holidays than in the previous year. Not surprisingly, both the ports of Los Angeles and Long Beach experienced an average anchorage time of eight days in the first quarter of 2021 for ships waiting for an unloading berth.
This additional time at anchor means not only a delay in getting containers unloaded and goods distributed, but also an increase in the cost of the overall transit of said containers. In some instances, the cost of sending a 40-foot container from Asia to the western U.S. has more than tripled in recent years.
Southern California seaports remain the primary point of entry for collision replacement parts coming from major manufacturers like Honda, Toyota, and Nissan and for aftermarket components coming from Taiwan. Data since the beginning of 2020 shows that aftermarket prices have been impacted more than OEM. For example, when we examine pricing for replacement hoods on 2014-2017 Toyota Camrys, we see that the average aftermarket price has increased by 5.11% since Q1 of 2020 but the average OEM price has only increased by 3.49% (Figure 1).
The increase in the cost of bringing parts to North America from overseas is causing many manufacturers to consider on-shoring (moving production domestically) or near-shoring (moving production to a country that shares a land border with the country where final vehicle assembly is to take place) their parts manufacturing operations. While such a move would certainly ease the availability concerns associated with global shipping delays, it is likely that companies would experience an overall cost increase due to the significantly higher cost of labor in North America when compared to the rest of the world.
Additionally, oil prices continue to climb (up 160% year over year at time of writing) which puts excess pressure on manufacturers of petroleum intensive products such as steel auto parts and polyolefin bumper covers. The rise in oil also typically means an increase in the value of scrap steel (up almost 100% year over year at time of writing) since it now becomes more cost effective to smelt down scrap for input materials than to manufacture new steel.
Why This all Matters
Auto recyclers will likely be able to increase prices to capitalize on these trends but perhaps not to the same degree as other companies that are reliant on raw materials and manufacturing. With the availability and price of new replacement parts in flux, recyclers may be able to take advantage of this potential hole in the supply chain by offering a reliable and consistent source of parts that is much more insulated from global macroeconomic disturbances. Even though recyclers are facing a tighter supply of salvage vehicles along with an increase in the cost of those vehicles, we are at a unique point in time where savvy operators have the opportunity to capture more market share and fill a significant gap in the ecosystem of collision repair both today and in the near future.
Ryan Mandell is Director of Performance Consulting at Mitchell International. He engages with auto insurance carriers to analyze claims data and identify opportunities for performance improvement. He also works with claims executives to develop action plans to optimize such opportunities and see them through to fruition, and provides continuing consultation to insurance carriers on the most up-to-date trends in the automotive industry. Prior, he worked at Autowrecking.com/B&R Auto Wrecking and with Precision Collision Auto Body.