Dear reader,
To twist an adage, when China sneezes the rest of the world’s manufacturers catch a cold. That more than ever applies to electric vehicle maker Tesla.
The extent of disruptions to Tesla’s production at its Shanghai factory has caught the attention of its investors. Covid-19 lockdowns in the city, now in their sixth week, have reduced output and caused logistics woes for Tesla. But things look much worse for its global peers, which rely on petrol cars for most of their earnings.
China matters to Tesla, and its chief executive Elon Musk touched on this in his interview at the FT’s Future of the Car summit on Tuesday. The electric car maker achieved a new sales record in China last year, with its turnover there swelling to almost half of its US sales.
As a result of the lockdowns, which included China’s largest auto manufacturing hubs of Shanghai and Jilin province, car sales in China have tumbled. In April, total sales fell 36 per cent, the most in two years (during the pandemic), to 1mn autos.
Tesla suffered badly, shipping just 1,500 cars from its Shanghai plant in April, according to China Passenger Car Association data. Normally, about 66,000 cars leave this plant each month. Moreover, production at Tesla’s factory in Shanghai has also grown in importance to global supply.
The China plant, Tesla’s first outside the US, had initially produced vehicles for the domestic market. But earlier this year, about 36,000 cars made there were exported to other parts of Asia and Europe each month. Any disruption at its China plants means an increasingly bigger problem for the global supply of these electric cars.
The hit to Tesla’s China sales should be shortlived, once lockdowns ease, which Musk also pointed out. But the same cannot be said for other companies that have been hit with wider, more lasting disruptions.
Toyota this week announced another round of production suspensions starting next week, which would affect the output of about 40,000 vehicles. Volkswagen, which also has plants in China, has already struggled with temporary shutdowns at some plants in Europe.
Even once lockdowns in China do ease and production schedules normalise, the prolonged closure of key auto parts makers elsewhere means a shortage of components threatens automakers’ output for the medium term. On top of a continuing chip shortage, low-tech parts such as wire harnesses, which are used to bundle and organise cables within cars, are in critically short supply as Ukrainian makers of these remain closed.
This is where Tesla has an advantage. Electric cars have far fewer parts, with about 20 moving parts in an electric engine. Compare that with up to 1,000 components for internal combustion engines.
Automakers such as Toyota — late to the shift to battery electric cars — are most vulnerable to the latest shortage. Any resulting price rise on automotive parts thus hurts. Toyota warned on Wednesday of an “unprecedented” jump in raw material prices, as it expects its materials costs to more than double to ¥1.45tn ($11bn) in the year to next March.
Toyota says such an increase could slash a fifth off its full-year profit. That piles on more misery for shareholders. The Japanese automaker also reported a sharp decline in operating profit for the quarter to March that was well below analyst expectations.
The latest round of suspensions, which affect a larger number of production lines and factories than previously expected, suggest any hopes that global disruptions might ease soon have been misplaced.
Enjoy the rest of your week.
June Yoon
Lex writer
Source: Economy - ft.com
