Chip Shortages Shutting Down Auto Assembly Lines; Buy Your Car Now Or Else

Global supply chains and just in time inventory work great – – until they don’t. Every car these days is a rolling computer, with semiconductors in every vehicle. No chips, no cars. For various reasons, there is a big worldwide shortfall in the chips needed for cars and trucks, which is causing auto assembly lines to shut down for extended periods. Car prices are already rising in response.

Chip production as a whole was slowed down this past year because of Covid effects at the factories. More importantly, chip production was switched away from automobiles to lighter consumer products. Auto assembly lines were curtailed due to the virus, resulting in reduced demand for those specific chips in 2020. The thinking among chip makers was that in the midst of a deadly pandemic, consumers would be sitting home ordering goodies from Amazon or Alibaba, rather than cruising car dealers or spending on travel. Indeed, U. S. spending on durable goods exploded in 2020, fueled in part by generous unemployment and stimulus payments, and this has soaked up existing chip production.

However, car buying has come back earlier than expected. Chip manufacturing is a lengthy process, taking some 26 weeks from start to finish. Chip makers are scrambling to add new capacity and to reconfigure their manufacturing lines for autos, but this shortage will not resolve until later in the year.

The winter storm in Texas forced four Austin area semiconductor plants to close, and the two big Samsung facilities have still not fully started up. And now this:

Renesas, one of the largest auto chip companies in the world, announces that a fire has impacted production at its Naka Factory located in Hitachinaka, Ibaraki Prefecture….Renesas holds a 51% share of the global automotive semiconductor market, which is currently experiencing a massive shortage that can allow the chipmakers to increase pricing.

Not to mention plastics shortages, also driven by winter storm impact in Texas. Kind of a perfect storm here. Under the circumstances, car makers have no choice but to slow or halt some production:

Honda (NYSE:HMC) said today that it would halt production next week at most of its five plants in the US and Canada. It blamed the chip shortages, supply chain issues – such as components hung up on container ships waiting off the coast – and the cold weather that resulted in broken pipes at some of its plants.

…Volkswagen (OTCPK:VLKAF) said this week that it lost production of about 100,000 cars worldwide due to the chip shortage, and that it is sitting a large backlog of unbuilt vehicles due to the chip shortages and the problems caused by the winter storm in Texas.

…On Monday, GM (NYSE:GM) shut down the plant that assembles the Cadillac CT4, Cadillac CT5, and Chevrolet Camaro. In February, it shut three plants in the US, Canada, and Mexico due to the chip shortage. The plant in Mexico will remain shut down through the end of March. The assembly plants in Fairfax, Kansas, and the CAMI plant in Ontario will remain shut down at least till mid-April.

These production cuts hit numerous models, but GM is trying to protect the production of its highly profitable full-size pickup trucks and SUVs, and those plants continue operating.

Ford (NYSE:F) has by now shut down or cut production at half a dozen assembly plants. In early February, it said that it would cut production of its F-150 pickup truck, the bestselling vehicle in North America. This is an immensely profitable product for Ford. It cut production by eliminating entire shifts.

Tesla (NASDAQ:TSLA) reportedly halted production of its Model 3 in February and early March for two weeks at its Fremont plant in California.

…This is happening amid hot demand for semiconductors in China where consumers, now largely barred from spending money on overseas travels, are, like Americans, splurging on durable goods, including cars. And this comes on top of efforts by Chinese companies to stockpile semiconductors in the era of trade restrictions.

Naturally, auto companies have tried to spare their most profitable lines from shutdowns. The fact that Ford has now had to cut production of its profitable F-150 line shows how deeply the chip shortage is biting.

Lost production worldwide is estimated at over 680,000 vehicles so far, with the prospect of a total 1 million to 1.3 million vehicles not produced in 2021 because of the chip shortages. Toyota managed to stockpile enough chips ahead of time to suffer only minimal impact, but GM projects a hit of $1.5 to 2 billion to its free cash flow. Ford expects the situation will lower its earnings by somewhere between $1 billion and $2.5 billion for the year. Ouch.

And now we come to the finances of you, the consumer. According to Your Auto Advocate:

From Black Book, “We are hearing more each week in the market about reduced inventory in the pipeline for Q1.With new car manufacturing facing supply chain struggles due to the microchip shortage, as well as a possible additional round of stimulus, the expectation is that pricing will remain strong throughout Q1 and into Q2.”

Other data from Black Book shows a recent increase in wholesale used car prices. As a result of limited new car supply we are seeing used car prices increase as well.

The bottom line: if you are planning to get a car (new or used), I suggest you act now, or else wait a year. Between the shortages and the stimulus money, prices are likely to keep rising for the next six months or so. Remember, you (maybe) read it here first.

Oh, and some macroeconomics: this is the sort of temporary inflation that the Fed expects for 2021, caused more by supply chain glitches than by long-lasting overheated demand. This is why the Fed is not planning to tighten, even if inflation starts running above 2% for a few months. Or so they say.

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