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A Potential Disaster for Ford

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Is a "perfect storm" about to hit Ford (NYSE: 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 (NYSE: GM  ) , Toyota (NYSE: 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 (NYSE: 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.

Another force to be reckoned with in the auto sector is high gas prices. Fuel costs seem poised to climb for the foreseeable future, which will drive innovation in this industry. On the flipside, the oil industry is poised to profit from rising energy costs. To gain a better understanding of investing in a volatile energy market, check out The Motley Fool's new special report, "The Only Energy Stock You'll Ever Need." It's completely free for Fool readers, but only for a limited time -- so get yours now.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 16, 2012, at 9:02 PM, ToddNissen wrote:

    A "potential disaster" for Ford? Please check the facts with us at Ford first and leave the drama to James Cameron before topping an article with such a misleading headline. Our factories continue to run, and to drag out the "perfect storm" analogy is premature, to say the least. The reality is there are a lot of steps automakers and suppliers can take to minimize and offset potential shortages -- before they hit the assembly line.

  • Report this Comment On April 16, 2012, at 9:17 PM, Jazzenjohn1 wrote:

    The sky is falling! the sky is falling! Sell all your Ford stock now!!

    I'll be waiting on the sidelines for the next suitable buy in period...

  • Report this Comment On April 16, 2012, at 9:38 PM, belseware wrote:

    To add to Todd Nissen's comment...he's right about the prematurity of this pronouncement. I want to focus on WHY NAME FORD IN THE HEADLINE?? What have you got against Ford? What did the article reveal about a vulnerability of Ford not shared by other automakers? Nothing. So what's the agenda here? Huh?

  • Report this Comment On April 17, 2012, at 9:01 AM, SMOKEN42 wrote:

    Rosevear couldn't hit water if he jumped out-of-a boat !!!!!!!!!!!!!!!!!!!!!!!!!!!!

  • Report this Comment On April 17, 2012, at 9:50 AM, SMOKEN42 wrote:


  • Report this Comment On April 17, 2012, at 2:13 PM, TMFMarlowe wrote:

    Guys, read the article, not just the headline.

    Could this be a big problem? You bet. Is it reasonable to focus the article's title on Ford, which has a disproportionately large following (as automakers go) among Fool readers? Yes. Speaking as a Ford shareholder myself, they need to be following this issue, and many will have missed the initial reports.

    I want Ford to succeed as much as anyone, but this is an investment, not a sports team. Think critically, y'all.

    John Rosevear

  • Report this Comment On April 17, 2012, at 5:39 PM, baldheadeddork wrote:

    For those who don't work in the business and have a life, Todd Nissen is the Manager of Corporate Communications at Ford. Good to see ya.

    John, I like you (and the reminder to think critically is always timely around here), but you wiffed it big on this one. As Todd notes and you admit, this isn't a story about Ford. You made it one because stories about Ford get a lot of attention. That's trolling your readers for clicks. And you overplayed what is known about the situation to build some kind of support for the "perfect storm" tease in your lead. There are writers on this site who need that kind of cheap stunt but you're usually not one of them.

    Don't be so quick to assume that people responding critically to this piece are fanboi's for Ford. I'm thisdamnclose to bailing on MF because the site is much too littered with articles like this. This _is_ about investments, so why is there so much emphasis on hype and sensationalism?

    And, in this case, it's not even well-thought sensationalism. If this "perfect storm" hits, the story is going to be about the global macroeconomic effects of 90% of auto production coming to a quick halt. If that happens for even a few weeks (which I think is very unlikely), it could probably throw the world back into recession. The new car industry makes up what percentage of global GDP and employs how many million people around the world? Take 90% of that out in a short period of time and everything will get ugly, fast.

  • Report this Comment On April 17, 2012, at 6:29 PM, TMFMarlowe wrote:

    @baldheadeddork: I value your perspective, and I hear what you're saying, and I don't need to "troll for clicks" so that one hurts. I admit that the headline is lurid, but is the article itself really sensationalistic? Here's what I was trying to say: Hey F shareholders, keep an eye on this story, because it could become a big problem. Is that misguided? If so, mea culpa.

    @Todd, we haven't connected before but your department has my phone number and email. Feel free to reach out directly, on this or anything else -- you can't count on me (or any of the other Fool writers) seeing and responding to a comment.

    John Rosevear

  • Report this Comment On April 17, 2012, at 7:30 PM, tomwittmann wrote:

    You have the chutzpah to advise your readers to read the article and not only the title and than write a false title??

    And I assume that the US companies are not so stupid as the Japanese appear to be to depend from a dole supplier for a product or if so, maintain a sizable stock

    And I even do not believe that the Japanese really

    needed nearly one year to complete the supply lost due to the quake/Tsunami, ;ess because of Thailands rains. This was a welcome excuse to justify their market break down, and they used the time to address the very big problems in their organization!

    Nothing coming from the Japanese automakers can be believed, more so from TOYOTA

  • Report this Comment On April 17, 2012, at 8:04 PM, tomwittmann wrote:

    And Mr. ROSEVEAR!

    If something is more concerning as the title of your article, is you "explanation". You try to make believe that you do not know how the lowbrains which manipulatate the informations react. Yes, many read only the title, and you must only see the todays relative performance of the Ford stock. And other, would decide not to buy a Ford, just in case!!

    No, Mr. ROSEVEAR, this was not an accident, but a very calculated step. If I were Ford I would sue you for you last cent and Motley Fool for intentional ot not intentional complicity.

    And. oh coincidence: A TOYOTA propaganda below the false title !!!

    Lets see if Motley Fool fires you with prejudice!

    It is time to not tolerate any more the cozy relation (not to use a stronger word) of Toyota with the media and analysts!!

    If not, the name shoufd be change to "make believe fool" !!

  • Report this Comment On April 18, 2012, at 7:08 AM, TMFMarlowe wrote:

    @tomwittmann: Re your first comment, the headline isn't a "false title" at all, and you should take a look at recent sales of the Camry, Prius, and Civic before you go too far down that road.

    As for your second comment... good luck with that.

    John Rosevear

  • Report this Comment On April 18, 2012, at 10:02 PM, tomwittmann wrote:

    @John Rosevear

    So now you play the cute card?? so would you agree if instead "false" I would have written "intentionally malicious and misleasing??

    An regarding the "cozy" relation of Toyota and other foreign companies with many media personalities and analysts, I am not alone to have lost the patience. Wait and see!!

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