The Chip Shortage Excuse Is Getting Old
2021-07-17 | Since 2 Month
Anjani Trivedi
Anjani Trivedi

Whether sales are rising or falling, automakers from the US to China have found a catchall explanation: the global chip shortage. For the laggards, the excuse is getting old.

In the US, a shortfall of semiconductors has forced manufacturers to shift from making more cars to better ones. These vehicles are selling at a swift pace and have boosted margins. Sales are rising, too, albeit showing signs of slowing as inventories run low. Volkswagen AG reported its best first-half performance in the US in almost half a century, while at General Motors Co., the figure increased by almost 40% over the same period.

In China, by contrast, sales are dropping swiftly. Yet carmakers aren’t even addressing how they’re managing the chip shortage. For homegrown champion Geely Automobile Holdings Ltd., the June figure fell 9%, after dropping 12% the previous month.

Elsewhere, India’s Tata Motors Ltd.-owned Jaguar Land Rover Automotive Plc said this month that the shortage has been much worse than expected and sees it deepening. Retail sales rose in the fiscal first quarter, and the company says it will continue to prioritize higher-margin production, but it now forecasts an operating cash outflow of about 1 billion pounds ($1.4 billion) and negative earnings before interest and tax margin in the second quarter. Daimler AG-owned Mercedes-Benz AG, meanwhile, expects sales to be affected in the next two quarters. The carmaker has managed to maintain luxury pricing power and preliminary second-quarter earnings beat estimates, despite lower production. In South Korea, sales are slowing at home but faring better overseas.

The divergence in performance shows that some companies were able to rise to the challenges of the pandemic by remaining nimble and managing production effectively — traits that will become even more critical amid the transition to electric vehicles. Their competitors, still blaming crimped performance on the shortage, should be worried.

There were few hints that the post-pandemic winners would shake out this way. Before the outbreak, the likes of Ford Motor Co. and General Motors were struggling. Facing weak demand, automakers used incentives to lure buyers, while the onslaught of technology, which requires heavy investment, and pressure to go green pushed margins lower.

Even if inflationary forces are making it expensive to manufacture cars, some companies have rejiggered production and model cycles to meet consumer demand. GM is already talking about how to best manage inventory going forward. Others, such as Toyota Motor Corp., have managed stock efficiently while Hyundai Motor Co. has allocated chips to more profitable models, including the Genesis GV70, a luxury performance SUV, sales of which are rising. Some automakers have even opted to skip certain features.

China’s top domestic car manufacturers have always been good at producing large volumes, which has turned the mainland market into the world’s largest. Historically, such companies were able to manage a fine balance between output, sales and inventory and keep prices stable. They tapped the right segments, churning out luxury or sport-utility vehicles, based on consumer demand. That softened the blow as sales fell before Covid-19 struck. Yet these players haven’t been able to adjust to the new post-pandemic reality, which is more about managing the bottom line and cash than keeping the lights on and cogs turning. This capital management is also going to be key to successfully turning to the inevitable onset of electric cars.

As auto sales weaken in China, mainland companies are churning out electric vehicles on the back of government support. That may seem like a good hedge, but it isn’t enough to lift the rest of the business. Most traditional automakers aren’t actually manufacturing EVs — it’s the far smaller, newer ones, which have their own set of issues. Meanwhile, volume doesn’t guarantee quality, and greener cars are far from a sure shot to profitability.

It’s hard to say when the chip shortage will abate. One thing is clear: The companies further along in readjusting to post-Covid life are likely to be the ones that can navigate the twists and turns on the road to next-generation cars. Those still blaming chips will likely be doing so for a while.


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