190. Climate change, floods, and the future of auto supply chains

Episode Summary

Executive Summary: The episode examines how climate-driven floods disrupt global auto production and how manufacturers respond by reallocating output across plants, at a cost. Using new research on 1,000+ plants in 54 countries, it finds floods sharply and persistently cut output, while firms partially hedge by shifting production to other sites. Greater resilience likely means more plants, smaller scale, spare capacity, and higher consumer prices.

Main Topics: Climate shocks to auto manufacturing (Priority: 5/5): Examples from Thailand, Detroit, South Africa, and Mexico show floods can halt assembly plants, damage inventories, and disrupt supply chains worldwide. How car supply chains are organized (Priority: 5/5): Cars rely on many bulky, geographically concentrated parts; about 60% of inputs are local, and multinational automakers coordinate production across many plants. Empirical research design and data (Priority: 4/5): The guest uses a global plant-model dataset and flood records to measure how nearby floods affect production at specific assembly plants over time. Production losses after floods (Priority: 5/5): Floods cause large, long-lasting declines in plant output, with effects persisting for years rather than quickly rebounding. Firms’ resilience through reallocation (Priority: 5/5): Automakers partially offset losses by shifting production to other plants making the same models, but recovery is incomplete and slow. Climate-change scenario analysis (Priority: 4/5): Future flood probabilities rise in major auto hubs, pushing firms toward diversification, more plants, and spare capacity, but with lower scale efficiency. Policy and consumer trade-offs (Priority: 5/5): Resilience acts like insurance: it reduces future disruption but raises normal-time costs, likely increasing prices and reducing variety for consumers.

Key Arguments: Automobile production is highly exposed to climate shocks because it depends on concentrated, bulky, and interlinked supply chains. A flood near a plant has a large negative effect on output, and the effect is persistent rather than temporary. The median auto plant is part of a multinational firm with multiple sites, enabling partial production shifting after disruptions. Firms can reallocate production to other plants making the same model, but logistical constraints mean recovery is only partial and delayed. Climate change increases the likelihood of floods in major manufacturing regions, so firms will face stronger incentives to diversify geographically. Greater resilience requires costly trade-offs: more plants, smaller plants, and more idle spare capacity reduce economies of scale. Consumers bear the cost of resilience through higher vehicle prices and potentially fewer model varieties. Public policy on resilience should be understood as paying an insurance premium now to reduce losses in future shocks.

Data Points: Flood-affected plants over 20 years: around 3 out of 4 plants - In the global dataset from 2000-2019, roughly 75% of plants experienced at least one major nearby flood. Average local sourcing share: about 60% of inputs are local - Typical car production relies heavily on nearby suppliers and geographically concentrated parts. Median distance for engine/transmission inputs: 170 kilometers - Average engine and transmission inputs are produced within this median distance of final assembly plants. Dataset size: more than 1,000 plants in 54 countries - The research uses a global production database with model-level plant information. Average models per plant: 5-6 models - Most assembly plants produce several models rather than only one. Average plants per model: around 3 plants - Common models are usually produced at multiple plants globally. Luxury model production footprint: single plant models - Highly specialized vehicles such as Rolls-Royce or Lamborghini may be made at only one plant. Honda Celaya flood closure: 4 months - The Honda plant in Celaya, Mexico, was shut after the 2018 flood until November. Celaya plant output: about 50,000 cars per quarter - Illustrates the scale of production lost when the Mexican plant was flooded. Output recovered at another plant: about 10,000 cars - Honda increased HR-V production at another Mexican plant to offset losses. Recovered share of lost production: about 20% - The unaffected plant recovered only a fifth of the flooded plant’s lost output. Downstream disruption in Indiana: 1 month shutdown - A component shortage from the flooded Mexico plant forced a plant in Indiana to halt production. Production after one year: down 20% - Average plant output remains substantially lower one year after a severe flood. Production after ten years: down 32% - The negative production effect persists and deepens over time in the estimate. Flood distance threshold used: 100 kilometers or less - Primary definition of a plant being affected by a flood in the analysis. Alternative distance checks: 25 km, 50 km, and 100 km gave similar effects - The results were robust across multiple proximity thresholds. Output at unaffected plants after reallocation: about 25% larger after five years - Firms shift production to other plants over time following flood disruptions. Historical flood risk in key regions: 1% annual events becoming 2.2% in Tennessee, 2.3% in Michigan, and 1.4% in Tokyo - Climate projections indicate much higher flood probabilities in major auto-production regions. Event frequency change: 100-year floods becoming 50-year floods - For severe events, projected probability roughly doubles in some places.

Pivotal Quotes: "This is like an insurance policy." — Chad Baume: Used to explain the trade-off between paying more now for resilience and benefiting during future disasters. "Whenever one plant of a particular firm is impacted by these floods, the firm is going to start reallocating cars or car production to their other plants." — Juan Macastro Vincenzi: Summarizes the empirical finding that firms use multi-plant networks to partially hedge flood disruptions. "Diversification comes at a price." — Chad Baume: Closing takeaway on the cost of resilience through smaller plants, spare capacity, and lost scale economies.

Implications: Automakers may become more geographically diversified, with smaller plants and extra capacity, raising long-run car prices while reducing vulnerability to climate shocks. Policymakers must weigh insurance-like resilience benefits against higher normal-time costs and fewer choices.