Challenges Facing the Auto Industry Post-Pandemic
From a lack of semiconductors to a shortage of skilled workers to low industrial vacancy rates, auto companies are facing challenges that are affecting their site and facility plans.
2021 Auto/Aero Site Guide
The disruption of the pandemic impacted nearly every facet of the automotive supply chain, causing a significant impact on how new projects are being developed and implemented. BDO’s annual 2021 Manufacturing CFO Outlook Survey showed that the number-one factor most critical to the recovery of the manufacturing industry is supply chain stability. Furthermore, CFOs surveyed indicated that 50 percent had plans to identify alternative or backup suppliers as a result of the supply chain disruption seen during the pandemic, with another 22 percent planning to reshore facilities to the United States.
Automotive OEMs and suppliers are no different, racing to realign supply chains by creating redundancy with suppliers and increasing inventory, much of which is being accomplished through new projects and onshoring to North America. Consequently, many automotive companies are now looking at network and supply chain optimization studies to better understand how to mitigate inventory shortages from a more traditional just-in-time (JIT) model, not just for parts, but also as this relates to long-term project and facility planning.
Semiconductors In Short Supply
The ongoing semiconductor shortage will continue to impact the automotive industry until long-term, domestic manufacturing solutions are put in place to address the shortage of finished product in the semiconductor space, including the production of upstream raw materials needed to produce these critical components. OEMs have been forced to stockpile unfinished vehicles, causing significant demand and driving up pricing for both new and used passenger, fleet, and commercial vehicle inventory. The shock across the economy has, and will, continue to be significant as OEMs struggle to deliver finished vehicles to the market.
This shortage does not just impact the OEMs but has a ripple effect over the entire U.S. economy and transportation sector. It is necessary for OEMs and suppliers to require these critical components to be made in multiple geographic regions, including North America, in order to diversify the supply base as the majority of semiconductors are currently produced in Asia, where most of the raw materials are also produced.
A Labor Shortage
Making the post-pandemic environment more challenging for automotive OEMs and part suppliers is a major labor shortage, which is impacting almost every sector of the economy and pushing more and more projects into secondary and tertiary markets. The government stimulus package that has paid low-to-moderately skilled workers, in particular, more to stay unemployed than to resume work — although coming to an end — is seen as one of the major drivers of this shortage. Upward pressure on wages has been seen across the automotive sector with most having to pay higher wages and even provide signing bonuses to attract skilled labor back to their positions. Recent discussions with Colliers and manufacturing employers across the country have shown a trend of higher starting wages that are expected to be permanent and last beyond the effects of the pandemic.
Making the post-pandemic environment more challenging for automotive OEMs and part suppliers is a major labor shortage. There is also a prevailing trend of companies shifting projects to Mexico and Latin America to reduce labor cost and project overhead but minimize distance to the end market of the United States. Locating projects in these countries carries a whole host of other geopolitical factors that require considerable deliberation and mitigation of risk. With a tight labor market seen across the country, the only way automotive companies can alleviate labor shortages is to better understand where there is available labor early in the site selection process. Labor analytics can help identify opportunities of capturing or recruiting vulnerable labor cohorts (i.e., those at the beginning of their careers, reducing commuting times, transferability of skills to a different industry sector, etc.) and provide cost comparisons between different submarkets.
Another impact on the labor supply is the “e-commerce effect” — i.e., Amazon and a handful of other online retailers are absorbing a significant amount of the skilled labor and distribution space in almost every submarket, even in secondary markets. The result is a major lack of available labor and existing product both in distribution and manufacturing — exacerbating an already difficult situation for automotive-related projects.
Lack Of Industrial Space & Rising Construction Costs
Even automotive companies that are retooling for electrification and building battery and mobility platforms are cannibalizing many of the available resources. Significant absorption of industrial product remains high, with vacancy rates hovering around the lowest they have been in over 15 years — sub 2 percent in most institutional markets. In addition to a lack of available product, project timelines are continually being depressed requiring delivery in less than six (6) months due to contractual obligations, equipment installation and commissioning timelines, or speed-to-market requirements. This is ideal when there are numerous existing facilities in a geographic preference, but that is not the case for most projects.
Manufacturers are also challenged by the fact that most of the existing and speculative (SPEC) product that is being built by institutional developers comprises distribution space. Even distribution space in many institutional markets is challenging to find in less than six (6) months, as much of the new construction is absorbed before the SPEC product is fully constructed, and new SPEC product coming online can easily take up to 12 months to deliver.
Furthermore, many markets are so active and have such a lack of competitive inventory, that many landlords have the opportunity to be more selective with whom they choose as tenants. In reality, this means landlords are providing fewer concessions, only accepting specific uses (even if the use is allowed per the local zoning requirements), requesting detailed financials, and being more stringent about the guarantee provided by the leasing entity. Even more challenging is the fact that many manufacturing facilities, which typically require additional infrastructure, zoning or permitting, also take substantially more time to become operational.
Significant absorption of industrial product remains high, with vacancy rates hovering around the lowest they have been in over 15 years. Construction cost has also risen significantly over the last 18 months, and in many cases, we are seeing overall construction cost that has risen by more than 20 percent in most submarkets. April of 2021 Producer Price Index for construction materials was 24 percent higher than a year earlier. This is having a substantial impact on project budgets, corporate approvals, and is slowing down project implementation. Industrial rental rates and construction cost are expected to increase for the foreseeable future, but they will stabilize, and industrial users will have to come to terms with the new cost of doing business or find value-add markets/opportunities.
Challenges will always exist for the automotive industry and its suppliers. The best strategy companies can implement is to provide ample time for site selection and execution, and to engage professional representation to assist them in the due diligence process. Colliers Site Selection Services typically suggests at least 18–24 months for proper project planning and implementation: at least six (6) months for planning and due diligence, which includes site selection and incentive negotiations, supply chain and transportation modeling, identification of sites and existing building options, labor analytics, side-by-side qualitative and quantitative evaluation, proforma operating analysis, facility planning, construction bidding, and finalizing incentive negotiations with various stakeholders in short-listed locations; and 12+ months for project delivery. This timeline is just an example and can be expedited based on the project scope and size, but as a takeaway, projects need ample time and skilled professionals that are globally minded but have local market knowledge and experience to deliver projects successfully and mitigate risk.
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2021 Auto/Aero Site Guide