A year after Japan’s tsunami sent global automakers and suppliers into triage mode, another disaster is sending the industry into a search aimed at salvaging this year’s car production.
Executives from the world’s largest automakers met today at a summit near Detroit to find alternative sources of resin used to make brake- and fuel-system components. The officials are searching for options after a March 31 explosion at chemical maker Evonik Industries AG halved the global source of an ingredient used to make the resin, called PA-12.
At stake is whether automakers can keep assembling cars and trucks after another breakdown in supply chains that are stretched taut around the world to minimize investment and parts inventory. Lost output of parts such as Renesas Electronics Corp.’s semiconductors and paint pigments made by Merck KGaA after Japan’s March 2011 tsunami resulted in disruptions that cost production and sales for automakers around the world.
“This is the risk you have to take to become more efficient, to gain some scale, to go just-in-time,” Itay Michaeli, an analyst for Citigroup in New York, said yesterday in a phone interview. “What we have to hope for is that, after last year’s situation, the auto companies followed through on what they told us they would do, which was to build more comprehensive Plan Bs in contingency situations like this.”
TI Automotive Ltd. warned its customers in an April 12 letter of severe shortages interrupting production “in the next few weeks.” The Auburn Hills, Michigan-based company supplies brake and fuel lines, as well as fuel tanks and pumps, to all major automakers, including General Motors Co. (GM:US), Ford Motor Co. (F:US), Toyota Motor Corp. and Volkswagen AG (VOW), according to its website.
About 200 executives from automakers and suppliers attended today’s summit, said Frank Buscemi, a spokesman for TI Automotive. Alternative materials were discussed and officials have planned “a number” of follow-up meetings in the next few weeks, he said, without being more specific.
“Indications are that near-term production disruptions are likely,” Rod Lache, an analyst for Deutsche Bank AG in New York, wrote today in a research note. “Disruptions will likely start in Europe” because U.S. and Asian purchasers of PA-12 “likely have several weeks of supply en route.”
TI Automotive and other suppliers recognized the tight supply of Cyclododecatriene, also called CDT, and PA-12 two or three years before last month’s blast at Evonik’s factory, said Neil De Koker, president of the Original Equipment Suppliers Association. While Evonik plans to add capacity in Asia, a new factory won’t be ready until the end of 2014.
“When an accident happens and it gets discovered this is a critical product that could affect shutting down assembly lines, people tend to get together very quickly,” De Koker said yesterday in a telephone interview.
While automakers and their suppliers have reacted quickly, it may be difficult for the industry to find a solution in time to avoid losing production because of the nature of the parts that use CDT and PA-12, De Koker said.
“Brake lines and fuel lines are safety products, so you don’t make changes overnight,” he said. “You have to do them very carefully with the right testing to prove out the product.”
Evonik has begun repairs at its factory in Marl, Germany, Ruben Thiel, a spokesman for the Essen, Germany-based company, said in an e-mail. “Every conceivable effort” is being made to rebuild the plant “before winter,” he said.
Other makers of PA-12 are France’s Arkema SA (AKE), Switzerland’s Ems-Chemie Holding AG (EMSN) and Japan’s Ube Industries Ltd., Thiel said.
Rising production of commercial trucks, which also require parts made with the resin, had stretched supplies even before the explosion, said Aurelien Paumier, director of Arkema’s technical polymers business unit for North America. Shipments of Class 8 trucks, the backbone of interstate hauling, may rise 12 percent this year in North America to more than 285,000, said industry consultant FTR Associates. That follows gains of 65 percent and 29 percent the past two years.
“Demand was very strong,” Paumier said yesterday in a phone interview. “The chain was already tense.”
Parts suppliers typically have about two weeks supply of the resin on hand, he said. Shortages of PA-12 probably will last about six to nine months, Paumier said. Arkema customers are testing alternative polymers, made from castor oil, he said.
The automotive industry runs “very efficient supply chains,” said John Hoffecker, managing director of AlixPartners LLP. The shortage of resins one year after limited supply of chips and paint pigments following last year’s tsunami reflects the tradeoffs automakers face: Carry extra sources of parts at higher costs, or go with fewer and risk disruptions.
“The minute you say you’d always like a backup for everything, that means the cost of the product goes from $1 to $1.20 or $1.50,” Hoffecker said yesterday in a phone interview. “People aren’t willing to pay to have empty capacity there just in case because there’s a cost to it.”
Ube Industries, Asia’s largest producer of the PA-12 resin used in cars, and DuPont Co. (DD:US), a maker of similar polymers, said order inquiries increased after the Evonik factory explosion.
DuPont has been working with customers “to get a good sense of range of the magnitude of the issue and if we have alternative materials that might help,” Carole Davies, a spokeswoman, said in an interview.
“We’re pretty sure that in some cases we do have alternatives that can help alleviate the potential for shortages,” Davies said. “There won’t be one solution for everything.”
DuPont, which doesn’t make or use PA-12, supplies Fiat SpA (F) with fuel lines made from a biodiesel form of its specialty polymers, which can replace some versions of PA-12.
Last year, ripples from the earthquake and tsunami in Japan, and flooding in Thailand disrupted auto production and cut supplies of Merck’s paint pigments to Ford and other automakers.
Toyota (7203) and other automakers aided Renesas, which makes chips that run dashboard meters and navigation and audio systems, by sending workers to repair its facilities near the disaster zones most affected by last year’s earthquake.
No automaker has announced canceled production yet as a result of the resin shortage, and officials have said they are monitoring their supply chains. GM has a global work team of purchasing and engineering executives looking for alternatives and is participating in today’s summit, Kelly Cusinato, a spokeswoman, said yesterday in an e-mail.
It will take years and “lots more” investments by automakers and suppliers to protect themselves in the event of future disasters, OESA’s De Koker said. An automaker like GM can order more than 160,000 different parts a day, he said.
“Protecting yourself by having significant inventories of materials in case some kind of catastrophe happens has to be weighed against what consumers are willing to pay and what your competitors do,” he said. “If one automaker takes its chances and keeps the price of its vehicles below their competitors, those competitors have to decide whether to risk shutdown or demand all that backup capability.”
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