Chip supply shortage threaten OEMs amid COVID-19

…As automakers battle for critical parts stockpile

Billions of dollars in earnings may be lost by automakers across the globe this year due to a shortage of semiconductor chips, a situation that’s expected to worsen as companies’ battle for supplies of the critical parts.

Consulting firm AlixPartners expects the shortage will cut $60.6 billion in revenue from the global automotive industry this year.

That conservative estimate includes the entire supply chain from dealers and automakers to large tier-1 suppliers and their smaller counterparts, according to Dan Hearsch, a managing director in the New York-based firm’s automotive and industrial practice.

“All the way up and down the supply chain, everybody is out some portion of money,” he said. “This could be 10 percent of global demand this year, its impact, which craters the recovery. We don’t think we’re overstating this’’.

Semiconductor chips are extremely important components of new vehicles for areas like infotainment systems and more basic parts such as power steering and brakes.

A 26-week lead time is needed to build the chips before they are installed in a vehicle, according to Hau Thai-Tang, Ford’s chief product platform and operations officer.

Origin of the shortage dates back to early last year when Covid caused rolling shutdowns of vehicle assembly plants. As the facilities closed, the wafer and chip suppliers diverted the parts to other sectors such as consumer electronics, which weren’t expected to be as hurt by stay-at-home orders.

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

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Although major semiconductor suppliers such as Taiwan-based Taiwan Semiconductor Manufacturing and United Microelectronics have announced investment plans to increase production capacities, IHS says such plans will do little to nothing to relieve the short-term shortage.

“Because the cause of these constraints is the result of increasing demand from OEMs and limited supply of semiconductors, it will not be resolved until both forces are aligned,” said Phil Amsrud, IHS Markit’s senior principal analyst for advanced driver-assistance systems, semiconductors and components.

One of the automakers most affected is Ford. The company was forced to significantly cut production this week of its F-150 pickup, which is critically important to the company’s profits. Ford said it is closely working with its suppliers to purchase the chips, which are largely unique to the pickup and can’t be substituted with those from lesser-priced vehicles.

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

Meanwhile, the Detroit-headquartered automaker has temporarily halted production at three car and crossover plants in North America through at least mid-March. The effort is meant to prioritize production of General Motors more profitable full-size pickups and SUVs, according to CFO Paul Jacobson.

GM and Ford have confirmed plans to partially build products and store them until supplies for the vehicles become available. Others have said they may look to directly purchase the parts from smaller suppliers, cutting out much of the current supply chain.

One of the only outliers so far is Toyota Motor, which on Wednesday said it has as much as a four-month stockpile of chips and was not immediately expecting the global shortage to hit production, according to Reuters.

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