Will automakers hold line on production or chase volume when parts availability improves?

Henry Ford once said, “Don’t find fault, find a remedy.”

As it turns out, the remedy found the automakers.

With the onset of the global COVID-19 pandemic, 2 million units were cut from North American auto production in the spring of 2020, and the ensuing microchip shortage cost the industry 7.7 million units. Suddenly, the financial equation flipped: Demand now greatly exceeds supply, and margins for manufacturers and dealers have never been better.

Many automotive CEOs are saying that as parts availability improves, they are not going back to the days of big inventories. They are going to remain disciplined with lean production and maintain tight availability.

The angels feel vindicated by these words.

But will the manufacturers continue listening to their better angels as parts availability improves? Or will the devils entice the car companies with the prospect of growing market share and driving revenue?

I wouldn’t bet against the devils.

Before the pandemic, North American auto manufacturing ran at only 80 percent capacity.

Today, it ranges from 40 to 65 percent as parts shortages drag on. Domestic production has fallen from 300,000 units a month to 120,000, according to the Bureau of Economic Analysis.

There’s not a single car company that’s satisfied with this level of plant utilization.

As Michelle Krebs, Cox Automotive executive analyst, wrote in a June 16 article, “New-vehicle inventory remained at the same level it has been for months [in May], according to Cox Automotive’s analysis of vAuto Available Inventory data, despite comments from some automotive executives that the global computer chip shortage is easing, and vehicle production is resuming to normal levels.”

But the problem only gets worse: Over the next five years, AlixPartners estimates that automakers will invest $330 billion on new electric vehicle production capacity.

Massive investments are already underway in North America, with Ford spending $11.4 billion on new EV plants in Tennessee and Kentucky. Hyundai announced $5.5 billion on a new plant in Georgia.

Others are rapidly following suit. Once these new EV plants come online, it will place even more downward pressure on existing internal combustion engine plant utilization as EV models become more prevalent.

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