Global supply chain networks interrupted by U.S.-China Trade disputes and the Covid-19 pandemic must diversify risk by identifying new factory sites and adjusting concentration risk
Bloomberg Intelligence (BI) expects diversification and increased capital spending to compensate for consistently slowed supply chains in the auto, pharmaceutical and semiconductor sectors. Among all three sectors, in both fast and slow-recovery scenario analyses, BI expects the automobile industry to bounce back before others, according to a new report by BI ̶ Global Auto, Tech, Health-Care Supply Chains Face Long Reckoning, published today at the Bloomberg New Economy Forum in Singapore.
The pandemic stagnated and then rapidly accelerated demand, placing further stress on an already building chip supply crunch over the past few years. Despite efforts to expand capacity, semiconductor supply shortages are unlikely to ease in the near future. BI expects semiconductor sales growth, at 8%, to outpace that of manufacturing capacity, at 7%. As the pandemic subsides but the supply-chain crises remain in place, chipmakers, as well as automobile, industrials, and IT manufacturers, may have to permanently adjust risk management inventory protocols to account for prolonged delays, as manufacturing adjusts to a wider array of assembly locations.
Masahiro Wakasugi, Senior Industry Analyst Technology, Japan at Bloomberg Intelligence said: “There are fundamental flaws in global chip manufacturing supply lines, for example the regional concentrations of specific chip components in Mainland China and Taiwan, that increase risk for prolonged product delays. In order for capacity to eventually catch up to demand, operational processes, factory focuses and locations need to be adjusted between the five major chip manufacturing hubs: Mainland China, Taiwan, Japan, South Korea and the U.S.”
Given congressional pressure to onshore pharmaceutical production due to the inspection requirements of importing medicinal ingredients from China and India, BI expects pharma giants to focus on bringing active pharmaceutical ingredient (API) facilities to the U.S. Consequently, said movement to domestic production sites would be costly and could hike up the prices of key generic prescriptions, as moving operating costs from India to the U.S. would increase from $15 million to $40 million per facility.
Ann-Hunter Van Kirk, Senior Biopharmaceutical Analyst at Bloomberg Intelligence said: “A variety of factors are pushing pharmaceutical makers to increase production stateside, one of those being the shrinking gap between manufacturing costs in the U.S. and Asia. Compounded with a growing interest in ESG practices, investment and sustainable development, BI projects that healthcare supply chains may start shifting to domestic operations as pharma giants are decreasingly incentivized by cheaper labor in India and China.”
BI projects that the auto industry may be among the first to recover from the chip shortage crisis. A wide variety of variables do factor into play when creating recovery projection models for the industry, especially given the spectrum of inventory shortages for chip types used in different vehicles. Based on the report’s early-recovery scenario analysis, BI expects auto-chip delays to be fixed as early as 1Q22. In a slow-recovery scenario, BI projects auto chip inventories to reach 5-6 months of stock by 2Q-3Q23, factoring in the chips that were already low in storage before the pandemic.
Kevin Tynan, Senior Automobiles Analyst at Bloomberg Intelligence said: “The production dynamics for European and Asia-based automakers, which typically keep a tighter handle on supply, should be different for U.S. brands that manage output. U.S. automakers will attempt an inventory vs. demand balance which supports firm pricing and wide margins whether there are ample chips and materials or not. Transaction prices in the U.S., which are historically 6.5% or $2,700 below Manufacturer Suggested Retail Price, were above sticker price industry-wide for the first time in history in October 2021, indicating the days of choking dealerships with units and then using profit-sapping discounts and incentives to move vehicles are over. With costs rationalized, U.S. automakers will aim for 50 to 60-day supply at retail, compared to a margin-crushing 80 days in the pre-pandemic period.”
Figure 1: Auto supply-chain inventory, scenario analysis
Source: Bloomberg Intelligence.
The full report is publicly available via the following link. Bloomberg Economics, part of Bloomberg Research, like BI, today also published a special report for the New Economy Forum entitled Long Covid, Jobs, Prices, And Growth In the Enduring Pandemic, which outlines the challenges the ongoing pandemic poses for growth, inflation, and development.