The impact of Red Sea disruptions on Europe's auto manufacturing

Bryan Chuang, Taipei; Vyra Wu, DIGITIMES Asia 0

Credit: AFP

Houthi attacks on vessels in the Red Sea have triggered alarms over trade disruptions, prompting several major international shipping heavyweights to send ships around the Cape of Good Hope. The repercussions are already manifesting in the European automotive industry, heavily reliant on the supply of essential components from Asia.

Across the spectrum of petrol, hybrid, and electric vehicles, Asia—comprising China, South Korea, and Japan—stands as a pivotal manufacturing hub for automotive components. China, with its cost efficiency and industrial clustering advantages, has become indispensable for European automakers. Statistics reveal that approximately 70% of components in the European automotive sector traverse the Red Sea waters from Asia. Potential delays in shipping schedules could impede the pace of European car production. Disruptions in the vital maritime route connecting Europe and Asia would invariably lead to logistical delays. In such a scenario, downstream car assembly plants would be compelled to pause operations until critical components, including transmissions, engines, motors, and electronic elements, are delivered, thereby resuming assembly.

Tesla's German facility and Volvo's European production lines have experienced halts due to shortages. Tesla attributes these disruptions to extended transportation times, causing supply chain lacunae, resulting in the temporary suspension of the majority of electric vehicle assembly production at its German factory from January 29 to February 11, 2024.

In response to the Red Sea shipping risks, European manufacturers are strategically considering options such as bolstering inventory, diversifying component suppliers in the Americas (e.g., Mexico and Brazil), or seeking alternative substitutes. In urgent scenarios, the strategic utilization of excess air cargo capacity could fortify supply chain resilience. This current Red Sea crisis diverges markedly from the chip shortage dynamic, where automotive customers face inventory shortages. The chip manufacturing sector's shift in production focus to consumer electronics posed considerable challenges in realigning production for automotive chips

Contrary to the chip shortage, the Red Sea crisis has translated into prolonged maritime transit times and heightened costs, with no reported sinking of cargo ships. Despite ongoing challenges, production operations are sustaining themselves in response to prevailing customer demands.

While the Red Sea crisis is still unfolding, the International Monetary Fund (IMF) forecasts a modest global trade growth of just under 1% in 2024. This prognosis underscores that, despite heightened sailing distances and costs arising, the foundational determinant of freight prices remains the intricate interplay of supply and demand dynamics in maritime shipping.

Projections for 2024 anticipate the delivery of 478 new container ships to the shipping market, adding a substantial capacity of 3.1 million TEUs. This marks a formidable 40% surge compared to the capacity in 2023. Global container ship capacity is expected to witness a commendable 10% increase relative to the preceding year.

The challenge of excess capacity is poised to persist in 2024, attributed not only to the introduction of new ships but also to the sluggish progress in decommissioning older vessels. Amidst the outlook for 2024, the Baltic International Maritime Council (BIMCO) foresees a 3-4% growth in demand for container transportation, further underscoring the likelihood of a sustained excess capacity scenario.