- Ford sales in the US dropped by 27 per cent year-on-year in June amid inventory pressures
- EVs are forecasted to outsell all other engine types by 2033, five years earlier than expected
The auto industry has been hobbled by the global shortage of semiconductors, leaving it unable to fully capitalise on robust demand from consumers for a set of new wheels during the pandemic.
The beginning of July marks the time when car companies release their sales data for the second quarter, and industry giant Ford (US:F) announced that it had sold 475,327 vehicles in the US from April through June, which was a 10 per cent increase versus a year earlier.
But sales in June were down 27 per cent year-on-year, reflecting the pressure that the paucity of chips is placing on stock levels. The company’s inventory stood at just over 162,000 vehicles at the end of last month, compared with 370,000 at the beginning of the quarter.
Thanks to ‘Chipageddon’, Ford is expecting to lose around a tenth of its planned production in the second half of this year, meaning it will make 1.1m fewer vehicles in 2021. This will translate to a $2.5bn hit to annual operating profit.
Rival General Motors (US:GM) is also guiding to a potential $2bn blow to adjusted operating profit this year, but it fared better than Ford in the second quarter. GM sold 688,236 vehicles in the US from April through June, which was two-fifths higher than a year earlier and also up 7 per cent on the first quarter. It believes that high levels of demand will persist through to 2022.
When the chips are down
The problem across the industry is therefore supply rather than demand. It is partly self-inflicted, as carmakers cancelled orders for silicon chips in the early stages of the Covid-19 crisis, and then found themselves at the back of the queue when they wanted to scale up production.
But the semiconductor supply chain has also been sideswiped by events beyond the pandemic. There was a cold weather snap in Texas in February that forced the likes of Infineon (DE:IFX) and NXP (US:NXPI) to temporarily shutter their operations, a fire at a plant owned by automotive chip supplier Renesas (JP:6723) in Japan in March, and a drought in Taiwan that could limit Taiwan Semiconductor Manufacturing’s (TW:2230) output as chip manufacturing is a water intensive process.
Tesla (US:TSLA) chief executive Elon Musk tweeted last month that “fear of running out is causing every company to overorder – like the toilet paper shortage, but at epic scale”, adding that he’d “never seen anything like it.”
The frenzy comes as cars are increasingly resembling computers on wheels – semiconductors are required for everything from automatic braking to entertainment systems. Electric vehicles (EVs) are even more reliant on chips. According to Infineon, there is on average $834 (£605) of semiconductor content in every EV, versus $434 for internal combustion engine (ICE) vehicles.
Stuck in the slow lane
Without access to sufficient chips, carmakers have been forced to rethink their activities. Big names from Volkswagen (DE:VOW3) to Nissan (JP:7201) have curbed production and even left out certain features on their vehicles to keep assembly lines running.
The semiconductor supply squeeze has translated to a car supply squeeze as automakers’ inventories come under pressure. Daimler (DE:DAI)-owned Mercedes Benz recently noted that “in spite of robust global demand and a healthy order intake... deliveries were significantly restricted by ongoing semiconductor shortages.”
This has had a knock-on effect beyond the car makers to car retailers as well. Adding to similar comments by Vertu Motors (VTU), Lookers (LOOK) and Inchcape (INCH), Pendragon (PDG) said last week that “it is becoming increasingly apparent there is likely to be some restriction of supply during the second-half of FY21, with vehicle order times already being extended."
It’s not all bad news, however, as tight stock levels have boosted pricing – Ford's average transaction price in the second quarter rose by $6,400 to $47,800 per vehicle. Still, consultancy Alix Partners estimates that the chip shortage could cost the automotive industry $110bn in lost revenue this year, up from a previous forecast of $61bn.
When will the chip shortage subside?
The clamour for semiconductors has been a windfall for the likes of Infineon, materials supplier Entegris (US:ENTG), equipment maker ASML (NL:ASML), and graphics processing unit (GPU) specialist Nvidia. It’s little wonder that the PHLX Semiconductor Index (SOX) – which tracks 30 leading companies in the chipmaking industry – is up almost 80 per cent since the start of last year.
Automakers would very much prefer to see the chip shortage in the rear-view mirror. Chipmakers are looking to boost their output and TSMC is investing $100bn over the next three years to increase its manufacturing and research and development capacity. But such projects are not a quick fix to the current pressures.
“It does take a very long time for semiconductor companies to increase output,” says Goldman Sachs analyst Toshiya Hari. “It takes time to purchase the tools. It takes time to install the tools. And the actual manufacturing of the chips takes a couple of months as well.”
He believes that the crisis will have peaked in second quarter of this year and that the shortage will begin to ease as we head towards 2022.
“That said, given the expectation for companies up and down the supply chain to restock inventory to a level that exceeds pre-pandemic levels, we would expect another couple of quarters of strong semiconductor sell in,” Hari says.
In the longer-term, governments are pushing to strengthen their domestic semiconductor supply chains. For example, the US Senate passed the US Innovation and Competition Act last month, which entails a $52bn investment in the country’s chip industry.
An electric future
While the chip shortage is weighing on the short- to medium-term outlook for automakers, it hasn’t impeded their focus on the transition to electric transportation. Stellantis (FR:STLA) – which was formed through the merger of Fiat Chrysler and PSA earlier this year – is investing £100m in its UK plant at Ellesmere Port to manufacture EVs from next year. This follows Nissan announcing a £1bn hub in Sunderland where it will assemble EVs, and its partner Envision AESC will set up a battery ‘gigafactory’.
GM is planning to phase out ICE vehicles by 2035 and has increased its spending plans for EVs and autonomous vehicles by 30 per cent. It now intends to invest $35bn in this domain by 2025 and rollout more than 30 new EV models.
Meanwhile, Ford is set to spend over $30bn on EVs by 2025 and is aiming for them to account for two-fifths of its total sales by 2030. A bright spot in its latest sales data was that EV and hybrid sales more than doubled in June, and reservations for its electric F-150 Lightning pickup truck – which is due to be launched next year – have reached 100,000 since May. Chief executive Jim Farley says that “we're not going to cede the future of battery electrics to anyone.”
The traditional automakers are rushing to catch up with Tesla, which appears to have navigated the chip shortage more successfully than the competition. It delivered 201,250 vehicles worldwide in the second quarter, up from 184,800 in the first quarter, and 90,650 a year earlier.
But Tesla is facing pressure on other fronts, particularly in China where consumers and regulators are expressing concerns about quality and safety issues. The company recently recalled more than 285,000 cars due to potential defects with their driver assistance systems.
That hasn’t deterred customers in the UK, however. Of the 186,128 new car registrations in June, more than a tenth of these were for battery EVs, with sales being led by Tesla’s Model 3. In fact, the Model 3 was the most popular car in the UK across all engine types last month, with 5,468 new vehicles being purchased.
Still, after a blistering run, Tesla’s shares have cooled somewhat, and are down almost a tenth so far this year. Meanwhile GM and Ford’s shares are up 42 per cent and 70 per cent, respectively.
As investors bet on who will lead the EV revolution, the electric future is approaching faster than anticipated. Consultancy EY now predicts that EVs will outsell all other engine types in Europe, China and the US by 2033, five years earlier than previously forecasted.
“A mix of changing consumer attitudes, ambitious climate-focused regulations and technology evolution is about to change the landscape of vehicle buying forever,” says EY global advanced manufacturing and mobility leader Randall Miller. “While the automotive industry has begun to more fully embrace the move toward electrification, the impact of this seismic shift is arriving sooner than many expected.”
Automakers may be stuck in the slow lane right now, but those with bold EV ambitions look ready to step up a gear.
