COVID strikes back: Industry Trends & Analysis

With the arrival of COVID-19 vaccines late last year, the pandemic was expected to peter out, and manufacturing activity looked to return to some sense of normalcy. The coronavirus, however, mutated its spiky head to become even more contagious and caused a new surge in cases.

Missing Chips

For the automotive industry, the increase in COVID-19 cases because of the highly contagious delta variant is keeping the microchip famine in place as pandemic-related lockdowns occur in Southeast Asia, such as Vietnam and Malaysia, where a significant amount of testing and packaging of semiconductors occurs.

“This has been the most recent domino that has fallen,” said Eric Anderson, senior analyst of North American light vehicle production forecasting for IHS Markit Ltd. in Southfield, Michigan.

According to the London-headquartered information and analytics provider, new cars typically require more than 1,000 computer chips as automobiles increasingly are becoming mobile computers.

Anderson said the semiconductor shortage gained steam earlier in the year after a winter storm hit chip plants in Texas, a drought in Taiwan affected water-intensive chip production and a fire at a Japanese semiconductor factory further reduced supply.

“Automotive for decades has had such resiliency in its supply chain,” he said. “But unfortunately, it has been pushed to the brink over the last eight or nine months. It shows it just takes that one component out of several thousand to have a material impact on the production build numbers.”

As of early September, the chip problem had reduced third quarter light vehicle production by an estimated 3.1 million units after the deficiency caused a 2.6 million second quarter hit, IHS Markit reported. Because of the chip shortage, Anderson expects auto production to be down in the fourth quarter as well, with the situation even lingering into 2022.

To maximize earnings while overall production is constrained, he said automakers are focusing on producing higher-profit, higher-volume vehicles, such as full-size pickups and sport utility vehicles.

“There still seem to be many people willing and ready to purchase a vehicle,” Anderson said. “Demand is still there in pretty strong numbers both in a fleet and retail perspective.”

Compared with pre-pandemic annual production of 16 million to 17 million vehicles in North America, IHS Markit forecasts about 13.1 million vehicles to be assembled in North America in 2021 after production of 13 million in 2020, in which inventory was depleted as a result of factory lockdowns during the first few months of the pandemic, Anderson said.

He said it is difficult to determine when production numbers will return to pre-pandemic levels.

“At some point, we know we’ll need to recover these inventory levels,” Anderson said. “But can it be done in 2022? It does not seem likely at this time.”

In the meantime, he said production levels will continue to determine sales, unlike the traditional model of sales determining production levels.

Although the short-term disruptions are unfortunate, Anderson said original equipment manufacturers are not letting the disturbances alter the long-term strategic shift toward electric vehicles. The electrification transformation will create an entirely new build process and significantly change the supply chain.

“We are still in the midst of one of the biggest supply chain disruptions that we’ve seen on top of the fact that there are other ripples on the water as well that haven’t had that material role but are still demanding time and attention,” he said. “If it’s not one thing, it’s another.”

Overcoming Turbulence

The aircraft industry also uses semiconductors, such as for black boxes and other electronic components. But because far fewer airplanes are produced compared with autos, the chip shortage is not a problem for plane manufacturers, said Richard Aboulafia, vice president of analysis for Teal Group Corp. in Fairfax, Virginia.

With November 2020’s return of the 737 Max narrow-body airliner, which was grounded in March 2019 after two crashes, he said Boeing Co. continues to deliver about 450 already-built Max jets and to ramp up production of the popular plane.

“The 737 Max is coming back,” Aboulafia said, “and people love it.”

He said the main concern for the industry is twin-aisle, wide-body jetliners.

“Everything else seems to be coming back fairly well,” Aboulafia said.

In addition to a reduction of international flights, especially as business travel remains subdued, he said airlines are shifting from twin- to single-aisle planes whenever possible.

“More and more international routes are being flown by smaller jets,” Aboulafia said.

He said one single-aisle plane that is particularly popular for trans-Atlantic flights is Airbus SE’s A321neo, or new engine option, which can travel more than 8,334 km (4,500 nautical miles) and seat up to 244 passengers with a “cabin-flex” option, Airbus reports.

“It’s the only jet that really is production-constrained rather than demand-constrained,” Aboulafia said. “It’s a nice problem to have in this day and age.”

He said the military and defense sector is also in decent shape, with pure-play contractors faring best.

With its pent-up demand, Aboulafia said the military segment is experiencing faster growth than other segments because the downturn last year was purely due to the logistical challenges of the pandemic, such as factory closures and equipment shipment disruptions. However, advanced development programs are at greater risk.

He said one segment that took a significant hit in 2020 but is coming back strongly in terms of utilization is business aviation. The recovery for small and medium-size business jets correlated with corporate profits and equities indexes.

“That really hasn’t translated yet to bigger orders or higher production rates,” Aboulafia said.

He said the industry did everything it could to survive last year, including loading up on debt, cutting head counts, deferring spending and selling “everything that couldn’t be nailed down. Amazingly, we came through it because of that. I can’t believe there weren’t more bankruptcies given the horror of the downturn.”

With the aviation industry poised for solid growth next year, Aboulafia said it all comes down to the risk of a prolonged or resurgent pandemic, such as from a coronavirus variant that’s even more contagious than delta.

“What happens if there is another shock to the system and everyone is stretched incredibly thin and maybe government assistance won’t be as forthcoming this time,” he said. “That is a real nightmare scenario that should keep everyone a little bit weary at night.”

Aboulafia said another concern that might interrupt a good night’s sleep is what the tight labor market means for commercial aviation. He recalled the consequences of the enormous growth in the industry because of the Vietnam War.

“Wages rose, and they rose faster for military workers, and that dragged more people over to that side of the house and made it harder for the commercial side to get the people they needed,” he said. “It has been an ongoing issue, and I think it’s going to get worse.”

World aircraft deliveries by value, 1989-2030

Air transport market by segment: A tale of two markets

Charts courtesy of the Teal Group

Robots to the Rescue

The pandemic has exacerbated the labor shortage by driving people from the workforce, said Joe Campbell, senior manager of strategic marketing and applications development for Ann Arbor, Michigan-headquartered Universal
Robots USA Inc.

“The operating assumption is people have decided to retire early,” he said.

Campbell said the coronavirus also added to the scarcity of labor by increasing reshoring as more manufacturers realized that producing goods more than 11,000 km (6,835 miles) away in China maybe wasn’t the best choice.

“You can’t react fast enough and make changes,” he said.

Even though a manufacturer can’t automate everything, robots can help alleviate the labor crunch.

“You want skilled workers and operators, and you let them do the most demanding tasks that are right in their wheelhouse,” Campbell said. “Let automation do the dull, the dirty and the dangerous. Because if you are having trouble hiring in general, try to hire for a crappy job. You can’t. People just laugh at you.”