The ongoing semiconductor shortage will cost the global auto industry $110 billion, according to a new study by AlixPartners, nearly twice as much as the consulting firm forecast in January.
And with the crisis expected to trim nearly 4 million vehicles off of industry production plans for 2021 consumers will be scrambling to find new cars and trucks — while also paying more for the vehicles they do purchase.
The crisis is even expected to cause chaos as the industry prepares to roll out its 2022 line-up, said Dan Hearsch, a managing director with AlixPartners, warning that, “There are simply going to be instances where they won’t be able to get all the parts” to bring some new models to market on time.
How did we get here?
The crisis is an inadvertent result of the COVID pandemic. When much of the world went into lockdown in spring 2020 auto industry planners expected sales to plunge to Great Recession levels. Indeed, the numbers dipped by as much as 40% in March and April, but demand unexpectedly rebounded by late summer. Sales this April reached record levels for a number of manufacturers.
But automakers had sharply cut parts orders and semiconductor manufacturers were only happy to oblige. They found a willing, alternative market in a consumer electronics industry struggling to keep up with surging demand for web cameras, smartphones and game consoles. Now, there’s not enough capacity to go around, and the auto industry has drawn the short straw.
If all that wasn’t bad enough, the situation has only grown worse during the last several months. The ice storm that crashed the Texas energy grid took a number of chip plants in the Lone Star State off line. A plant operated by Japanese supplier Renesas, which provides a third of global automotive microcontrollers, caught fire on March 19. It is only slowly ramping production back up. And drought in Taiwan, one of the world’s largest sources of semiconductors, has led to cutbacks at the nation’s water-intensive chip factories.
“For a while it felt like a badly written comedy, the size and scale of the things breaking,” said Hearsch. “Now, we’re starting to feel the pain.”
Hitting the bottom line
While some manufacturers have managed to secure some of the chips they need, the crisis has hit pretty much every company large or small, mainstream to exotic. All told, the new AlixPartners study anticipates 2021 vehicle production will fall 3.9 million below initial forecasts and cost $110 billion in lost revenues. That’s up 80% from the firm’s January forecast of $61 billion.
Ford, for one, last month warned that it will lose more than 1 million vehicles for the year. The company handily exceeded Wall Street forecasts for first-quarter earnings. But it expects sales and profits to stumble in the months ahead. Most key competitors anticipate taking similar hits.
The timing couldn’t be worse. Even without the shortages dealers would be struggling to keep inventory in stock. April saw U.S. sales reach an annualized rate of 18.5 million which, if it were sustained, would amount to an all-time industry record.
But where manufacturers like to maintain an average 60 to 70 days’ worth of vehicles on showroom lots, inventories are down to a 30-day average among AutoNation dealerships, and are falling fast, CEO Mike Jackson told TheDetroitBureau.com.
The country’s largest dealer chain has been able to work around that, in many cases, with new online tools allowing customers to see not only what’s in inventory but track what manufacturers are shipping. But delays are stretching, said Jackson, some customers now being asked to wait as long as four to six weeks.
And things could get worse, warned AlixPartners’ Hearsch.
Got ’em, need ’em
The typical vehicle now uses about 1,400 chips and the number can grow rapidly on high-line luxury models and new battery-electric vehicles.
Manufacturers are trying every trick possible to minimize factory disruptions. They’re trying to form alliances directly with chip manufacturers. Some, said Hearsch, are even working with competitors, “horse trading” chips they have for ones they need from the other company.
They’re also modifying some products, even leaving out features that might otherwise delay production — a process known in the industry as “shy-build.” Some GM pickups are rolling out without the engine control system that helps add another mile per gallon. Ram has stopped equipping pickups with camera-based rearview mirrors.
But such steps can only go so far, said Hearsch, adding that a big concern for the industry is the likelihood that some of the 2022 models set to go into production in the coming months will be delayed — perhaps for months.
How long the crisis will continue is a matter of debate. The Renesas plant, for one thing, is slowly starting up lines impacted by the fire. And the Biden administration has been leaning on trade partners, like Taiwan, for help. There could be an improvement in the third or fourth quarter, said Hearsch, who believes, “The next few weeks should be the worst.” But that’s far from certain and “the timeline” could extend, he cautioned, “into next year before things have any chance of clearing up. And that’s if nothing else goes wrong.”
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