How global challenges are affecting vehicle supply

Vehicle manufacturing is under growing pressure, as war in Ukraine exacerbates ongoing supply chain challenges and pushes up energy costs. What does this mean for fleets and drivers?

From Covid-19 supply chain disruptions to the emerging energy crisis and war in Ukraine, the global economy is facing unprecedented challenges, and it’s impacting the cost and availability of new vehicles. LeasePlan data reflects a 5.71% increase in list prices for the most popular cars and light commercial vehicles since the start of 2021, while the time between ordering and delivery doubled to almost 120 days during the same period.

Our recent webinar, co-hosted with experts from Deloitte, examined in detail how market instability could affect both fleets and drivers. Here’s what you need to know.

Chip shortages

What is the problem? Semiconductor chips are a vital component of modern vehicles, used in everything from engine management to safety assistance features, and supply isn’t keeping pace with record demand. Only a handful of specialist facilities – called ‘fabs’ – supply the automotive industry and a combination of Covid-19 mitigation measures, extreme weather and fires have reduced output. With a six-month lead time to bring fabs online [1], there’s no quick fix.

How does this affect fleets? Manufacturers have removed equipment and prioritised popular models and trims to sustain production, but chip shortages have led to longer lead times, cancelled orders and a stifled post-pandemic recovery for Europe’s new car and van market in 2021 [2, 3]. Despite record order banks, car and van registrations in the UK were down 14.3% and 27.6% year on year at the end of March [4, 5]. Some manufacturers have shored up their own supply, but semiconductor shortages are expected to continue disrupting production for most of this year [6].

Battery costs

What is the problem? Global electric vehicle sales doubled during 2021, to 6.6 million units, according to the International Energy Agency [7], and it’s putting pressure on battery supply chains. Following an 89% reduction in the cost of lithium-ion battery packs between 2010 and 2021 [8], strong demand caused a 10-20% rise in raw material costs at the end of last year [9]. That trend has continued, with suppliers claiming a five-fold price increase in material costs compared to a year ago [10].

How does this affect fleets? Battery packs account for around a third of the cost of an electric vehicle [11], so big cost increases could affect list prices. Tesla, Ford and Volkswagen [12, 13, 14] have all committed to an alternative cell chemistry, aimed at reducing the nickel content in their battery packs. With EV demand unlikely to slow down, some analysts are warning that price rises could be an even bigger incoming challenge for the automotive industry than semiconductor shortages [15].

Fuel and energy prices

What is the problem? Europe is in the midst of a once-in-a-generation energy crisis. Global demand for gas spiked as economies recovered from Covid-19, leading to wholesale prices four to eight times higher than seasonal norms last autumn and predictions that this will stay well above the average during the summer [16]. Because almost 40% of the UK’s electricity comes from gas power stations [17], this has caused record rises in energy costs.

Meanwhile, wholesale fuel prices increased 50% in the 12 months to April 2021 [18], alongside operating costs [19]. Pump prices for petrol and diesel had increased by 30% and 35% respectively at the end of March [20, 21].

How does this affect fleets? Rising fuel and energy prices affect operating costs for all businesses. More than three quarters (77.4%) of domestic freight is transported on the road [22], and the logistics sector has warned that the 5p per litre fuel duty reduction in isn’t enough to cover additional costs, which means they get passed on to customers [23]. This affects the price of consumer goods, including parts and materials to build and maintain vehicles.

This also affects running costs for fleets, and potentially their drivers too. HMRC’s advisory fuel and electricity rates are adjusted every three months, and these have yet to catch up with rising costs. There are tax implications for businesses who adjust them.

 

Efficiency Cost per mile AFR/AER
(per mile)
March 2021 March 2022
Petrol
(1,401-2,000cc)
44.9mpg [24] 12.7p [25] 16.6p [25] 15p
Diesel
(1,601-2,000cc)
51.3mpg [24] 11.4p [25] 15.4p [25] 13p
Electric 3.5mpkWh 5.3p [26] 8.1p [27] 5p

 War in Ukraine

What is the problem? The Russian invasion of Ukraine triggered unprecedented global sanctions on its economy, including movement of goods, as well as disruptions to Ukrainian industry as a result of the conflict itself. It’s still too early to predict how long this will last, what additional measures will be introduced, and how long those will continue.

How does this affect fleets? Alongside the human tragedy, the conflict is leading to higher inflation rates and further disruption to supply chains and energy production. Russia and Ukraine both have pivotal roles, including:

  • Fuel: Russia supplies 41% of natural gas, 47% of the coal and 27% of the crude oil imported into the European Union [28], and member states have voted in favour of a complete embargo [29]. Although the UK only gets 4% of the UK’s gas [30] and 8% of its oil [31] from Russia, an international embargo would restrict supply and could increase energy prices.
  • Components: Ukraine has 17 factories making wiring looms for cars and vans [32], and they cannot be built without these critical components. Volkswagen Group has said it will shift some capacity elsewhere to keep production going [33], while BMW, Mercedes-Benz and Porsche have all cited supply problems due to the conflict [34].
  • Materials: German automotive association VDA has warned that Ukraine is a vital producer of neon gas used in semiconductor manufacturing, while Russia supplies palladium for catalytic converters and nickel for batteries [35]. Any shortages could extend lead times and increase vehicle manufacturing costs.

A recent forecast by analysts at S&P Global Mobility suggests vehicle factory shutdowns and sanctions in Russia and shortages of components and materials from the war in Ukraine could reduce global vehicle production by 2.6m units in 2022 [36].

Covid-19 Restrictions

What is the problem? Although most of Europe has relaxed or removed Covid-19 restrictions since the start of 2022, the pandemic hasn’t ended yet. A surge in cases in China has led to strict lockdowns in industrial and technology hub cities such as Shenzhen and Changchun [37] and more recently in Shanghai [38]. There is still a risk of new variants elsewhere, too.

How does this affect fleets? It’s unlikely that the world will see restrictions introduced at the scale we saw in 2020. However, lockdowns can affect factories and cause short-term disruption to automotive supply chains with little or no warning.

Changes to grant funding and regulations

What is the problem? Grant funding for electric vehicles is steadily being wound down in the UK, prioritising growth areas as the market for electric vehicles takes off.

  • The Plug-in Car Grant has been reduced from a maximum £2,500 to £1,500 per vehicle and is only available for models with a recommended retail price of less than £32,000 (previously £35,000) [39].
  • The Plug-in Van Grants have also been revised. Small vans (<2,500kg GVW) qualify for up to £2,500 (down from £3,000), while the large van category is now capped at £5,000 (previously £6,000) and the maximum GVW has been raised from 3,500kg to 4,250kg [40].
  • The Electric Vehicle Homecharge Scheme is no longer available for single-occupant properties (such as houses and bungalows) [41]. Separate regulation comes into force on 30 June, requiring all units to include a data connection and accurate usage monitoring [42] which is estimated to add between £100 and £400 to the cost of a domestic chargepoint [43].

How does this affect fleets? Reduced funding and tighter criteria will result in higher prices for some models, and also adds cost for customers installing home chargepoints.

What can you do to minimise disruption, and how is LeasePlan UK helping?

The challenges amount to a perfect storm for the automotive industry, but we’re working hard to keep your business on the road. In the short term, however, we would advise taking some extra steps to minimise any disruption:

  • Expect delays: Long lead times and higher prices are likely to be the norm for the rest of this year. With delays likely, it’s worth identifying future fleet needs earlier than usual, particularly for mission-critical cars and vans, so we can highlight any supply challenges in advance and find solutions to keep you moving.
  • Plan ahead: Aim to place orders between six and nine months ahead tell us as soon as possible if vehicle contracts need to be extended.
  • Think electric: With incentives and CO2 targets furthering demand for plug-in vehicles, some manufacturers are prioritising production of these models. Accelerating your electrification plans could help keep orders on track.
  • Consider Alternatives: If your needs change, LeasePlan Flexible provides fast access to specific cars and vans from our own stock, including low-CO2 plug-ins, from several weeks to two years. There’s no long-term commitment, so you can simply extend, or off-hire, vehicles as needed.
  • Speak to Us: We’re here to help! Your LeasePlan account manager is on hand to listen to your concerns and will help keep your business moving.

 

 


 

REFERENCES:

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