A GLOBAL semiconductor (microchip) shortage is disrupting automotive production and may delay the recovery of new vehicle sales and profitability in the sector.
Car-makers are reducing output and selectively idling plants until the shortage eases which is expected to take several months.
Some automakers and suppliers may reconsider their supply chains, opting for greater vertical integration and localisation, which could require additional investments.
Increased demand for consumer electronics during lockdowns has led to the global microchip shortage, first reported in December 2020.
The situation is particularly acute for automotive companies which are experiencing a strong increase in electric vehicle demand while chip-makers often reserve supply for larger technology companies.
“The shortage is disrupting automotive production in most regions – leading to sporadic slowdowns and selective plant shutdowns – although the overall scale and magnitude of the problem is not yet known,” observed Fitch Ratings.
“We expect disruptions to continue for several months and to dissipate in 2H 2021.”
The modern car is extremely complex. The average car has at least 50 chips with electronics account for over 40% of the entire bill of materials.
By 2022, Deloitte estimates that every car will have about US$600 worth of chips. The semiconductors handle everything from controlling seat positions, to anti-lock brakes, and in-car entertainment systems, though autos with assisted driving technology and electric vehicles typically contain more microchips than others.
Global lost vehicle production could reach about one million units in 1Q 2021, according to Wards Intelligence and LMC Automotive.
As such, it makes valid sense for car-makers to prioritise available chips for their most profitable and best-selling models – where possible – to reduce pressure on earnings.
Thankfully, Fitch Ratings does not expect the ratings in the sector to be affected unless the microchip shortage lasts well beyond a few months.
“Some car-makers and auto suppliers may re-evaluate their supply chains as a result of this shortage, opting for greater vertical integration in electronics and diversifying their pool of suppliers with higher production localisation rates,” suggested the credit rating agency.
“This may require additional capex and research & development (R&D) costs which could weigh on cash flow generation.”
For now, car-makers in Japan and India are experiencing disruption in their production with expected shortfalls in the low single-digit percentage range, according to Fitch Ratings.
However, many producers have built up finished products inventory which will help to cushion pressures on sales and profitability.
Honda is seeking production cuts in China while Toyota has been able to return to normal production in the country after initial alignments in mid-January.
Toyota’s diversified supplier base and higher component inventories also help mitigate pressures. South Korea’s Hyundai and Kia avoided material chip shortages as they maintained larger orders.
“However, the decision by European car-makers and suppliers to reduce chip orders due to their cautious expectations of a vehicle demand recovery has contributed to the region’s supply shortage,” Fitch Ratings pointed out.
The Volkswagen group is the most affected manufacturer by the shortage in Europe. Daimler has also announced that it will cut production of Mercedes cars in a few plants in Germany and Hungary.
In North America, car makers could lose about 230,000 units of production in 1Q 2021 which roughly equates to a 5% shortfall in production, according to preliminary assessments.
Ford has had a few production slowdowns and temporary shutdowns as a result of the microchip issue. General Motors has not announced any such issues yet, but some vehicle options may not be currently available. – Feb 1, 2021
