Chip Threatened Auto Makers Sell Less, But Profit More

Demand for new cars in Europe is strong although slowing, and auto makers must be laughing all the way to the bank right?

Well no, because despite a clamor for new cars unleashed after the coronavirus lockdowns came to an end, production is being hampered by a shortage of crucial semiconductor chips, so that’s bad. Again, not really, because the product shortages mean the big auto manufacturers aren’t having to compete against each other for every sale, and so can gouge top profit margin dollars out of every sale.

“Isn’t (the auto business) a funny industry – the fewer cars manufacturers sell, the more money they make,” said Bernstein Research analyst Arndt Ellinghorst in a report.

And the sales growth slowdown is set to continue for the rest of the year, according to LMC Automotive, as it cut its forecast for Western Europe again. In its report on the first 8 months of the year, LMC Automotive said sales for the year will only rise 2.5%, compared with its month previous forecast of a 3.0% gain and July’s prediction they would jump 9.6% in 2021. For the first 8 months the annual selling rate was 11 million vehicles a year, which sounds a lot until you remember before coronavirus struck the annual selling rate was well over 14 million. The market is now weakening because of the semiconductor shortage.

“While the pandemic is not over in the region, the single biggest challenge facing the industry is now the auto chip shortage, which is currently constraining vehicle (sales) due to the lack of availability of vehicles, and those that are available being higher priced. With the current challenges likely to continue well into next year, we have lowered our near-term outlook in recent months, only seeing a more pronounced pick up in selling rates over the course of the second half of next year when supply constraints ease,” LMS Automotive said in a report.

The chip shortage will get worse before it gets better, said Fitch Solutions, and will only start to improve in 2022. This is because the Delta Covid-19 variant will continue to disrupt chip production in Asia, it said.

“We still only expect an overall improvement in the global supply of chips from mid-2022 onwards as new chip production capacity starts to come online. However, there will still be a shortage to some extent until mid-2023,” Fitch Solutions said.

Data firm IHS Markit

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expects the global chip shortage to extend well into next year and cut its global car and SUV production forecast by 5 million this year to 78.5 million and to 82.6 million for 2022, cuts of 6.2% and 9.3%.

Investment bank Morgan Stanley

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said the automotive industry remains hostage to a lack of semiconductors.

“The situation has gone from ‘fluid’ to downright inexplicable. If semi supply is recovering in aggregate, why does this remain such an issue for autos,” Morgan Stanley said in a report.

“How long will this last? When will things return to normal,” the report asked, adding acute tightness will last through 2021, with normality not being restored until the 2^nd half of 2022.

“It’s quite possible that just as the chip shortage situation came upon the industry in a sudden and unpredictable manner, its recovery may also come in a sudden and unpredictable way,” the report said.

Bernstein Research pointed out the combination of the coronavirus pandemic and shortage of chips forced fewer vehicles to made and lifted pricing and second hand market prices, with first half margins the highest in automotive history. But the report pointed to some investors believing fundamental performance will deteriorate because the industry will quickly revert to chasing sales once bottlenecks disappear.

“We believe this is an overly cynical and depressing view on the industry and its management teams. Our boardroom conversations suggest that supply/demand and vehicle pricing are at the very top of (manufacturers) agenda,” the report, headlined “Premium Pricing – Can you please not mess this up!”, said.

But investment bank UBS said it was hearing much cautious comment about the current quarter, with production recovery likely to take longer than initially anticipated.

“While the unprecedented price/mix situation for (manufacturers) will likely continue for longer, supporting strong margins, the loss of volume in the 3^rd quarter is likely to lead to a sequential decline in profitability compared with the first half,” UBS said in a report.