A Potential Disaster for Ford
Is a "perfect storm" about to hit Ford (NYS: F) and other key players in the global auto business?
A factory explosion in Germany seems an unlikely catalyst for a global automotive crisis, but the March 31 blast that damaged a chemical plant belonging to Evonik Industries AG could lead to global shortages of a critical chemical within weeks -- and that, in turn, could bring auto assembly lines around the world to a screeching halt.
A sudden shortage of an obscure but important chemical
TI Automotive, a privately held Michigan manufacturer of automotive components, said in a letter to clients last week that the Evonik explosion had led to a "severe" shortage of a critical substance used to make parts for automotive brakes and fuel systems, according to Bloomberg.
The damaged factory was a key producer of a chemical called cyclododecatriene, necessary to make the substance, called PA-12, a kind of nylon that TI and other suppliers use to make parts that are exposed to certain harsh chemicals -- like gasoline and brake fluid.
TI warned its clients that the likelihood of parts shortages that would disrupt production at their plants was "high" -- and that's a huge deal, because TI supplies just about everybody. Ford, General Motors (NYS: GM) , Toyota (NYS: TM) , Volkswagen (OTC: VLKAY.PK) and nearly every other automaker you've ever heard of is on the company's client list, and any or all could be affected by this shortage.
The automakers haven't had any substantive comment so far other than to say that they're investigating the problem, but from all appearances it's a big problem. Ube Industries, a Japan-based producer of PA-12 that supplies about 10% of the global market, said on Monday that it had received requests for added production. But Ube's factories are already running at full capacity -- and shortages are probably inevitable, a spokesperson told Bloomberg.
Those shortages could slow or stop production lines in auto factories around the world. Needless to say, that could be a huge, expensive problem for Ford and other automakers.
How big a problem will this be?
It seems incredible that one small industrial disaster could affect so many massive global corporations, but in today's tightly connected world of automotive suppliers, it's a real problem -- and issues like this are becoming more common. We saw something like this last year, albeit on a different scale, when factories producing complex electronic components for Toyota and Honda (NYS: HMC) were destroyed by the Japanese tsunami. Both automakers saw production of several key models slowed for months.
This could -- could -- be far more wide-reaching, if other suppliers can't manage to make up the lost production in time. But it's still too early to know the likely impact. TI and other makers of affected components are holding a "summit" with representatives of the major automakers and major suppliers on Tuesday. It's likely that more information will be available after that.
Of course, this couldn't come at a worse time for the global automakers. While the white-hot Chinese auto market has cooled, and Europe continues to struggle with economic challenges, auto sales in the U.S. have been picking up steam in a big way in recent months.
That increasing strength here in the U.S. has been a big shot in the arm for key players like Ford, which restructured its operations to be profitable even at historically low levels of auto sales -- and which stands to see significant growth in profits as sales continue to rise and its newly strong economies of scale come into play.
Shortages could disrupt sales momentum significantly for any affected automaker -- but who will be affected, and how badly? We'll have to wait and see. But keep a close eye on this one, because it will force automakers to adapt quickly and effectively.
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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at@jrosevear.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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