The automobile industry dominates a large share of the world’s economic activity despite overcapacity and low profitability issues. Over 60 million automobiles are produced annually, and they consume over 50% of the oil. Further, the industry employs over four million people and benefits a large number indirectly. Automobile industry employees also get some of the best benefits around. Being so big, the industry is undoubtedly exposed to a number of factors. This article will discuss the economic factors affecting the automobile industry. The COVID-19 pandemic greatly affected the world’s economy, and the automobile industry, previously on a decline, was significantly impacted. Global car sales dropped by 15% between March and May in reaction to the worldwide lockdowns and movement restrictions. The drop in car sales occurred simultaneously with a decline in new car production. Many factories and plants were closed during the outbreak in China, culminating with zero production in Wuhan. The OICA reported that the industry produced around 78 million cars in 2020, a 16% drop from 2019’s volume, making for the biggest fall in the history of car manufacture. Global sales were expected to drop to below 70 million in 2021, a sizeable drop from the 97 million units produced in 2017. Therefore, the car industry has seen a steady decline since 2018, and the same is expected to continue for the next few years.
Gas prices are at an all-time high, and that is not expected to change anytime soon. The national average price per gallon is well over $4.00 and is expected to get close to $4.50 before the year ends. These are the highest numbers since 2008. Analysts and experts are astounded by the unprecedented rise but many point to the ongoing conflict between Russia and Ukraine. Russia’s invasion of Ukraine has had a reverberating effect around the world, and many people are worried about how it might impact them. What is for sure is that prices will go up, especially for gas. Other commodities expected to become more expensive include smartphones and food. Shortages will lead to inflation and rising prices of raw materials like metals, wheat, and oil, materials Russia stands as a major producer. This inflation will also be happening at a time when prices are already exorbitant, rising at the fastest pace in over four decades. It is hard to predict when or how bad the inflation will be, given the complexity of the invasion, sanctions against Russia, and the ones likely to come. The sanctions imposed by the West are new and unprecedented, making it hard to determine what the future will be like. This is especially the case given Russia’s size as the 11th largest economy in the world. Gas prices have been unstable over the last two years. A gallon cost $2.58 at the start of 2020, which went down to around $1.70 by the end of the first quarter. Prices then went up to $2.20 by the middle of the year in July, where they remained for the rest of the year. Gas prices steadily increased throughout 2021, hitting $3.28 at the year’s end. Prices are now at a little over $4.10, the highest they have been since mid-2008. The current situation the automobile industry finds itself in can be traced to a combination of factors.
Blue Chip Shortage
The chip crisis was always a possibility as production has been a little behind the demand and the pandemic only served to accelerate it. Other important factors like the explosion of the IoT industry saw the demand go up and above the current supply. Further, the pandemic made usually-normal events significant blockages. For instance, the chip shortage was exacerbated by drought in Taiwan, extreme weather in Texas, and a fire in one of the major chip fabrication factories. Analysts expect car production to fall by around 4 million units this year. All manufacturers expect a reduction in earnings by the end of the year. Chips are an essential component in modern cars as they are featured in many parts. Today’s typical car has around 1,400 chips, and the number is expected to increase as vehicles become more advanced. The chip shortage has seen car prices hit their highest in recent memory. The industry is likely to lose over $100 billion, and manufacturers are buckling down, their primary strategy being increasing car prices. The situation has been worsened by the fact that delivery times are almost triple what they were a few years back. This is especially the case in the luxury car sector, given how chip-intensive they usually are. It has got to a point where people have to pay a premium to get their cars delivered right away.
Rising interest rates have the automobile industry concerned. The Federal Reserve announced pending interest rate hikes that could see the industry lose over $20 billion. Increases in interest rates are also likely to discourage consumers from buying cars. Customers are likely to refrain from borrowing to finance cars. This is simply because they will have to pay more for the same car. Almost three-quarters of all new car sales are backed by auto finance. This increase was primarily due to the low-interest rates we have seen over the last few years. The Federal Reserve slashed interest rates to zero in response to the Covid-19 pandemic and other significant emergencies. Having to pay no interest on loans encouraged people to take more and more credit, which resulted in the industry’s growth. Increasing interest rates will have the opposite effect and see a decline in the industry. This will be worsened by the fact that manufacturers will have to increase prices to offset some losses. All costs will be shifted to the consumer, and they are likely to keep from buying cars in response. Banks stand to be some of the main beneficiaries of hikes in interest rates. Higher interest rates mean more revenue from affording the same sizes of loans.
The automobile industry is one of the largest in the world, which means its exposed to a number of factors and elements. The most consequential factors the automobile industry faces today include gas prices, the blue-chip shortage, and interest rates. The industry is highly sensitive to gas prices because it consumes over half of the world’s supply. A look at past trends reveals that the industry’s production has always been in line with gas prices. Increases in gas prices are followed by decreases in production and vice versa. The world is reeling from a severe shortage of computer chips. Modern automobiles are chip-intensive, and the shortage has seen production fall rapidly, especially over the last two years. It, therefore, comes as no surprise that the recent shortage has reduced the number of units in production, which has led to increased prices. Interest rates are another critical factor given how financing accounts for over three-quarters of cars sales. The car industry has been on a steady decline over the last few years, and that is expected to continue. Most importantly, the Federal Reserve has announced upcoming interest rate hikes, and Russia is invading Ukraine, events that are expected to worsen the situation.