How Crisis in the Red Sea Could Impact EV Industry

Houthi attacks on ships passing through the Red Sea have forced most shipping container companies to suspend operations in the critical shipping lane. The electric vehicle industry is one of the many sectors that are now dealing with the fallout of the ongoing Red Sea crisis.

Despite enjoying record sales in 2023, car manufacturers Tesla and Volvo recently announced that they were halting electric-vehicle production in the European market due to a lack of key vehicle parts. With the Red Sea channel virtually unusable due to the Houthi rebel attacks, container ships have no choice but to take the much longer route around the African continent.

This route adds significant time to the trip and increases fuel and labor costs. As a result, EV parts are taking longer to reach factories and often cost more. The parts shortage is further exacerbated by China’s monopoly on various segments of the EV supply chain, such as the production of lithium-ion batteries.

Combined, all these factors have severely constrained the global supply chain and made it more costly to ship critical EV components to factories in Europe. Shipping companies will undoubtedly pass these costs down to EV companies that will, in theory, increase their vehicle prices to compensate for the increased production costs.

However, electric vehicle prices have trended downward for the past several months largely thanks to aggressive price cuts by Tesla. The Texas-based electric vehicle manufacturer has been the top EV seller in China. However, stiff competition from cheap Chinese electric cars forced Tesla to cut prices to remain competitive.

Increasing their prices right now would be counterintuitive to Tesla’s goals as consumers would simply gravitate toward cheaper EVs from China, especially now that high-interest rates have made it even more costly for consumers to acquire EVs. Temporarily halting production until supply chains open up again may be the best option for electric car makers.

In the meantime, we can expect factories that produce a single product, such as Tesla’s Berlin Gigafactory, to idle their production lines, send hourly paid workers home, and retain salaried staff in safety checking and testing roles. Vehicles manufactured in China such as Volvo will also face delays in reaching the European market because they will also have to avoid the Red Sea and travel a longer route.

Peter Sand, a shipping analyst at leading ocean and air freight rate benchmarking and market analytics platform Xeneta, also notes that ships taking the longer route are producing an average of 2,700 extra tons of carbon dioxide per ship.

Manufacturers such as Lucid Motors (NASDAQ: LCID) now have the additional hurdle of tweaking their supply chains in order to get electric vehicles to their customers cost effectively in spite of the challenges of moving products through the Red Sea.

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