After Semiconductors, Here's Another Billion-Dollar Problem Awaiting The Global Automobile Industry

The world’s largest carmakers are in for a rude shock, potentially, if the power crisis in China sustains. After being hit with the chip shortage, which had crippled the output of the automobile industry across the globe, the new threat comes from the lack of aluminium alloy.

Carmakers, across the globe, use aluminium alloy to produce gearboxes, steering wheels, seat frames, and fuel tank covers in cars. However, one of the key components that go into the production of this alloy is magnesium.

As with a lot of other critical components, China has a near-monopoly on magnesium. The recent power cuts in China, owing to the coal crisis within the country, have dented the production of magnesium and consequently, the aluminium alloy.

Already, in Europe, there is a severe shortage of alloy.

A large part of magnesium goes into the production of aluminium sheets used in cars, and while there is no substitute for the former, the shortage of it leaves car manufacturers with no option but to temporarily halt production.

Magnesium also adds to the strength of the alloy and hence is even more critical.

As per a report in the Financial Times, most carmakers are not factoring in the magnesium shortage yet in their estimates, but that could soon change.

As much as 85 per cent of the world’s magnesium comes from China and a large volume of it from a town in Shaanxi province.

For the rest, production was ordered to be cut by 50 per cent. Thus, in three months, carmakers could be looking at a rude shock, some even early, as December — which is the time for festival orders, across the world.

The supply-demand dynamics are already reflecting the problem in Europe. In the month of October alone, the per tonne price of magnesium has surged over 75 per cent.

A metal trade association in Germany urged the government to start diplomatic talks with China to address the issue. As per the Financial Times report, the magnesium crisis could peak across Europe at the end of November, hitting festive production levels, adding to the losses for the carmakers.

The crisis should pose a fresh set of challenges for the carmakers just as they were beginning to recover from the chip crisis. Given the shortage in chips, automakers in several parts of the US were forced to cut jobs and workers’ hours, further denting an economy battered by the pandemic.

Consequently, General Motors was forced to halt production at its three North American plants, and Ford Motor Company was staring at a 20 per cent drop in short-term output.

For the auto industry alone, the chip shortage could result in a hole anywhere between $80 billion to $200 billion, as per different estimates.

This is yet another instance where an over-dependence on China within the supply chain will haunt the global manufacturing fraternity.