Global chip shortage: How the auto industry is coping with high demand and limited supply

The global chip shortage of 2021 has roiled the auto industry leading to production cutbacks of over a million vehicles, record low inventories and elevated list prices, with $110 billion in projected lost revenue for the year. Ford, which is instituting plant shutdowns this month, said it expected the chip shortage to lower its 2021 earnings by $2.5 billion. Jim Farley, the CEO, warned this spring that “the impact to production will get worse before it gets better.”

General Motors at first cautioned earnings may be impacted by the shortage and then announced it was more “optimistic” about how it was managing by prioritizing semiconductor use. “The global semiconductor shortage remains complex and very fluid, but the speed, agility and commitment of our team, including our dealers, has helped us find creative ways to satisfy customers,” said Phil Kienle, GM vice president, North America Manufacturing and Labor Relations, in a statement. Since the COVID-19 pandemic, for example, GM has employed focused ordering to get the top-selling and fastest-turning models to the head of the line, according to the GM Authority. 

Other big-name manufacturers have been pinched during the chip shortage including Chrysler, Jeep, Hyundai, Nissan, among others, according to AutoForecast Solutions, which tracks production cutbacks. “Virtually no manufacturer nor a region has been untouched,” said Michelle Krebs, executive analyst, Cox Automotive. “It has hit China, Japan, Europe and North America.”

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The industry, which is coming off profound changes from the COVID-19 pandemic, is having to take a hard look at the just-in-time model made popular by Toyota, supply chain logistics and the distribution cycle, Krebs said. Executives, she stressed, are paying more attention to the supply chain and monitoring suppliers.

A lot of this Sturm und Drang is happening in the thick of things. The pain of the global chip shortage for the automotive industry is likely at its highest point now, just as the summer driving season gets underway. Goldman Sachs’ chief Asia economist Andrew Tilton told CNBC this week, “Our analysts believe we’re probably in the worst period of that right now—that is we’re seeing the biggest disruption downstream (in) industries like auto right now and that will gradually ease over the back half of the year.”

U.S. Commerce Secretary Gina Raimondo said the global shortage would be a “daily challenge” for the “next year or so.” The Biden administration, for its part, is working with the private sector to increase the supply chain transparency and data sharing. Congress is working on the issue as well. The Senate passed a bill allocating $50 billion in emergency spending to address the shortage. The House is working on its own legislation.

The global chip shortage was a long time in the making, Paul Wick, lead portfolio manager of Columbia Seligman Communications and Information Fund, told Columbia Threadneedle Investments. “The dynamics playing out today have been building for decades,” he said.

From a supply perspective, Wick said: “Semiconductor companies have been moving away from independent production to a more efficient outsourcing production model since the 1990s, resulting in less slack. Moreover, most equipment manufacturers also no longer carry, or hold, a very slim chip inventory—a pivot that occurred after some huge inventory write-downs when the tech bubble burst in 2000.” 

For the automotive industry, according to Columbia Threadneedle, “many auto manufacturers canceled semiconductor orders at the outset of the pandemic, expecting lower demand for cars, but then they realized people wanted more autos, not fewer. By that time, there were no chips available. In some cases, chips have become so central to the automotive supply chain that the lack of one specific, unremarkable chip can bring production to a virtual standstill.” 

It has been estimated there are hundreds of chips in modern vehicles. Deloitte predicted that by 2030, the electronics system will make up 50% of the total car cost from 35% in 2010. Factory-installed components include everything from safety sensors to powertrain parts to instrument panels to infotainment and much more, the firm said in its 2019 report on the next wave of semiconductors.

The cost of semiconductor content (the components that make up electronic systems) has grown from $312 per car in 2013 to around $400, it said. “Automotive semiconductor vendors are benefiting from a surge in demand for various semiconductor devices in cars, such as MCUs, sensors, memory and more. By 2022, the figure is expected to reach close to $600 per car.”

Krebs of Cox Automotive noted that the firm predicted a supply crunch was coming, especially after the surprising surge of consumer demand during the pandemic and then various issues with suppliers. “We could see how fragile the supply chain was,” and then the chip shortage happened. As of May 17, the most recent data available, Cox Automotive found the national average days’ supply of models was 35 days, the lowest since it had been tracking the shortage.

The total U.S. supply of available unsold new vehicles stood at 1.78 million units as the end of May approached, down from 2.24 million at the same time in April, according to a Cox Automotive analysis of the vAuto Available Inventory data. Toyota, Lexus, Chevrolet and GMC had the lowest inventories, Cox found.

“Strong sales and further tightening of inventories resulted in even higher prices in May. As the month closed, the average listing price was $40,566, up from $39,633 for the same timeframe in April. Prices by end of May were running 5.5% ahead of 2020 and 10.3% ahead of 2019,” Cox said.

According to the research site Edmunds.com, the shortage has increased demand for used vehicles, which are also more expensive and in somewhat limited supply. The CPI report released this week shows that seasonally adjusted prices of used cars and trucks jumped 7.3% in May.

Car buyers are finding that dealerships are less likely to discount their vehicles, and “roughly one in eight shoppers now pays more than the sticker price,” according to Edmunds.

Ivan Drury, Edmunds’ senior manager of insights, said, “At the rate we’re going, it’s going to be a lot tougher for car shoppers to find exactly what they want this summer.”

Meanwhile, as auto executives make changes to meet the greatest demand during this crisis, Krebs said: “There is a big upside to this situation for automakers and dealers. Vehicles are selling at top dollar with few incentives and little discounting; expenses like floorplan/interest is way down; cost to carry inventory is nearly nil since vehicles are turning so fast.”

“Profit margins for automakers and dealers have never been higher,” Krebs added. “Plus, at some point, automakers will make up some production. This low inventory situation has been so beneficial in those ways that automakers are looking at how they can continue it under a non-crisis situation—making distribution more efficient, less expensive.”

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