By Eric Huang    Photo：by SarahSever from Pixabay

The recent attacks by Houthi rebels on ships in the Red Sea have raised alarms about trade interruptions, prompting several major international shipping giants to reroute their vessels around the Cape of Good Hope. This crisis has already started to impact the European automotive industry, which heavily depends on crucial component supplies from Asia.

Asia, including countries like China, South Korea, and Japan, is considered a pivotal manufacturing hub for automotive components used in various vehicles, including gasoline, hybrid, and electric cars. China, in particular, with its cost-efficiency and industry clustering advantages, has become an indispensable part of European car manufacturers' supply chains. Statistics reveal that approximately 70% of components in the European automotive industry are transported from Asia via the Red Sea. Delays in shipping times could potentially disrupt the rhythm of European car production. Any disruption to the vital maritime routes between Europe and Asia is bound to lead to logistical delays. In such cases, downstream car assembly plants may be forced to halt operations until critical components like transmissions, engines, motors, and electronic elements are delivered, allowing production to resume.

Tesla's German factory and Volvo's European production lines have both experienced shutdowns due to component shortages. Tesla attributed these interruptions to extended transit times, leading to supply chain disruptions. From January 29th to February 11th, 2024, Tesla's German factory suspended most of its electric vehicle assembly production.

To mitigate the risks associated with the Red Sea shipping crisis, European manufacturers are strategically considering options such as bolstering their inventory, diversifying component suppliers (e.g., exploring sources in Mexico and Brazil), or exploring alternative solutions. In emergencies, the strategic use of ample airfreight capacity can enhance supply chain resilience. Unlike the dynamics of the semiconductor shortage crisis, the automotive sector is grappling with inventory shortages. Shifting semiconductor manufacturing towards consumer electronics products poses significant challenges for recalibrating automotive chip production.

Unlike the semiconductor shortage, the Red Sea crisis has led to extended shipping times and increased costs but has not reported any sinking of cargo ships. Despite facing challenges, production operations continue to address existing customer demands. Today's global supply chains are intricately coordinated, with the delivery of goods to factories (and from factories to customers) closely tied to demand. Predicting this demand has become a massive industry worth over $27 billion.

However, even with all this information, the industry can change overnight due to political tensions, pandemics, or situations like vessels stuck at sea, as seen with electric vehicle batteries in China. As concerns mount about vessels carrying everything from clothing to smartphones and car batteries needing to circumvent the Suez Canal, these crises have driven up container shipping rates. The Suez Canal is the fastest route between Asia and Europe, accounting for approximately 12% of global container shipping traffic. Maersk, last Friday, indicated that they anticipate rerouting to continue in the foreseeable future, adding around 10 days to the journey from Asia to Northern Europe and incurring an additional fuel cost of approximately $1 million.

If manufacturers are unable to produce due to component shortages, factories that produce a single product like Tesla's Gruenheide factory near Berlin (which manufactures the best-selling Model Y SUV) have only one option: shutdown. Workers on hourly wages are sent back home, and wages continue for other roles where feasible, such as security checks and testing.

Tesla and Volvo still have other factories and product lines that can continue to operate. However, even alternatives produced in Chinese factories to substitute for European deliveries are also affected by the need to traverse the Red Sea route. Automaker Geely, for instance, while able to manufacture Volvo cars in China, has warned that European consumers expecting new cars in early 2024 may inevitably face delivery delays.

In conclusion, the Red Sea crisis has had a severe impact on global supply chains and the automotive industry. Due to attacks and transportation issues, European car manufacturers face the risk of component supply disruptions, potentially leading to production halts and delivery delays. Companies like Tesla and Volvo have already felt the impact of this crisis and had to suspend operations temporarily. Furthermore, the rerouting of the Suez Canal has driven up container shipping costs, exacerbating supply chain pressures. Both automakers and consumers are grappling with challenges related to delayed deliveries and uncertainty. In this situation, suppliers and manufacturers need to take strategic measures to address uncertainty and ensure supply chain stability to maintain smooth automotive production and deliveries.
 

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