How Covid Leads a $ 60 Billion Global Car Manufacturer Deficit

This photo shows Ford 2018 and 2019 F-150 trucks on the assembly line at the Ford Motor Company’s Rouge Complex on September 27, 2018 in Dearborn, Michigan.

Jeff Kowalsky | AFP | Getty Images

Automakers worldwide are expected to lose billions of dollars in earnings due to a shortage of semiconductor chips, which is expected to worsen as companies struggle to deliver the critical parts.

The consulting firm AlixPartners expects the deficit to cut $ 60.6 billion in revenue from the global automotive industry this year. According to the Conservative estimate, the entire supply chain is included – from dealers and automakers to large Level 1 suppliers and their smaller counterparts, according to Dan Hearsch, a managing director of the firm’s automotive and industrial practice in New York.

“All the way up and down the supply chain, everyone has a share of the money,” he said. “It could be 10% of global demand this year, what could be its impact, what the recovery of the foundation depends on. We do not think we are exaggerating it.”

General Motors expects the chip shortage to reduce its earnings by $ 1.5 billion to $ 2 billion this year. Ford Motor said the situation could reduce its earnings by $ 1 billion to $ 2.5 billion in 2021. Honda Motor and Nissan Motor together expect to sell 250,000 fewer cars by March due to the shortage.

‘Mesgeveg’

Semiconductor chips are extremely important components of new vehicles for areas such as information systems and more basic components such as power steering and brakes. Depending on the vehicle and its options, experts say a vehicle can have hundreds of semiconductors. Good prices with advanced security and information systems have much more than a basic model, which includes different types of chips.

“I can not imagine anyone being spared,” Hearsch said. He said the situation could turn into a ‘knife fight’ between businesses, industries and even countries for the delivery of the chips, which are used in everyday consumer electronics.

One of the only outliers so far is Toyota Motor, which on Wednesday said it had as much as four months’ worth of chips and, according to Reuters, did not immediately expect the global shortage to reach production.

Zachary Kirkhorn, chief financial officer of Tesla, told investors during the quarterly earnings call last month that the shortage as well as the transportation of port capacity could have a temporary impact on the carmaker. In a public documentation, the company said the impact of the shortage is ‘still unknown’, saying the unavailability of parts could affect production.

Scramble for chips

Car manufacturers scramble to get supplies of the chips, which due to their complexity have very long lead times. The shortage is far in the supply chain, causing a ripple effect throughout the network.

Some car manufacturers, such as GM and Ford, have confirmed their plans to partially build and store products until supplies are available for the vehicles. Others said it would be possible to buy the parts directly from smaller suppliers, which would cut out much of the current supply chain.

Research firm IHS Markit expects 672,000 fewer vehicles to be produced in the first quarter of 2021 due to the shortage of semiconductors, including 250,000 units in the world’s largest vehicle market, China.

Although major semiconductor suppliers such as Taiwan Semiconductor Manufacturing in Taiwan and United Microelectronics have announced investment plans to increase production capacity, IHS says such plans will do little or nothing to alleviate the short-term shortfall.

“Because the cause of these limitations is due to the increasing demand of OEMs and the limited supply of semiconductors, it will only be resolved until both forces are in line,” says Phil Amsrud, senior chief analyst at IHS Markit for Advanced Driver Assistance Systems, Semiconductors . a component.

One of the car manufacturers most affected is Ford. The company had to significantly reduce production of its F-150 pickup this week, which is extremely important to the company’s profits. Ford said it is working closely with its suppliers to purchase chips, which are largely unique to the pickup and cannot be replaced with lower-priced chips.

This is different from GM’s competitor. The Detroit carmaker temporarily halted production at three car and crossover plants in North America until at least mid-March. According to Paul Jacobson, CFO, the effort is intended to prioritize the production of its more profitable pickups and SUVs.

How did we get here?

The global automotive industry is an extremely complex system of retailers, automakers and suppliers. The latter group includes larger suppliers such as Robert Bosch or Continental AG who obtain chips for their products from smaller, more focused chip manufacturers such as NXP Semiconductors or Renesas.

A nod in the supply chain during any part of the process can have a tremendous ripple effect throughout production.

“This is a classic example of the bullwhip effect,” said Rlamat Gaurav, chief executive of supply chain and analytics firm Llamasoft. “Small changes in demand as it propagates upstream in the value chain, volatility and volatility grow dramatically.”

A close-up of a CPU socket and motherboard lying on the table.

Narumon Bowonkitwanchai | Moment | Getty Images

Many of the problems start at the bottom of the supply chain involving ‘wafers’. The wafers are used with the small semiconductor to create a chip which is then placed in modules for things like steering, brakes and information systems.

According to Hau Thai-Tang, Ford’s chief product platform and operating officer, a delivery time of 26 weeks is required to build the chips before they are installed in a vehicle.

The origin of the shortage dates back to early last year when Covid caused the shutdown of vehicle assembly plants. As the facilities closed, wafer and chip suppliers diverted the parts to other sectors, such as consumer electronics, which were not expected to be so hurt by stay-at-home orders.

“Those chip makers as well as wafer makers have started redesigning their ability to like consumer electronics, which has increased due to people working at home and virtual work patterns,” Thai-Tang said at an investor conference last year. “Fast forward, if you add 26 weeks to the time they made the decisions, the drain or the trough in the offer started falling into the car the last half of last year.”

But demand for new vehicles was more resilient than expected during the shutdown, especially by consumers, so the industry recovered much faster than anyone expected. While this was happening, chip suppliers continued to divert resources from the car, trying to catch up with demand from the automotive industry.

“There is no easy way out of this,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research. “Last year we knew that once they could flatten the curve and get safety protocols in place, they could return to production. That is not the case now. We have very long delivery times and more and more demand for chips.”

– CNBC’s Lora Kolodny contributed to this article.

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