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Chip shortage could cost automakers up to $110 billion

“For a while it felt like a badly written comedy, the size and scale of the things breaking. Now, we’re starting to feel the pain.”
Inside CSI ESM Ltd. As Global Chip Shortage Crisis Worsens
The global chip shortage is going from bad to worse with automakers on three continents joining tech giants in flagging production cuts and lost revenue from the crisis.Chris Ratcliffe / Bloomberg via Getty Images

The auto industry will suffer a $110 billion hit to revenues this year due to the ongoing shortage of semiconductor chips, according to a new analysis from AlixPartners consulting firm. That is a steep increase from January estimates of $60 billion.

With no clear resolution in sight, the industry will likely produce about 3.9 million fewer vehicles than originally planned for all of 2021, the firm said. The chip shortages are not only curbing production of current models but may also force delays in the rollout of some 2022 products.

Consumers, meanwhile, already are finding it harder to find the vehicle of choice — or any vehicles, in some cases. At the same time, prices are surging.

“The next few weeks should be the worst,” said Dan Hearsch, managing director with AlixPartners, adding that the timeline could extend “into next year before things have any chance of clearing up. And that’s if nothing else goes wrong.”

The crisis is an inadvertent result of the Covid-19 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 percent 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 had found a willing, alternative market in a consumer electronics industry struggling to keep up with surging demand for web cameras, smartphones and gaming consoles. Now, there’s not enough capacity to go around, and the auto industry has drawn the short straw.

Complicating matters, the ice storm that shut down much of the Texas electrical grid also affected chip plants in the state. A serious fire took down a major Japanese plant. And there’s even been a drought in Taiwan forcing production cuts in one of the world’s largest sources of semiconductors.

“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.”

Automakers large and small, from General Motors, Volkswagen and Toyota, to Bentley, Aston Martin and Ferrari, have been affected. They’ve been forced to slow production at factories around the world and, in some cases, to halt assembly lines entirely.

The crisis has hit some of the best-selling and highest-profit vehicles in the industry, such as the Ford F-150 pickup. The second-largest automaker posted a big jump in first-quarter earnings — but Ford warned the coming months will not be nearly as good, with more than 1 million vehicles likely to be slashed from its own 2021 production forecast.

Dealers are feeling the pinch at a time of year when they normally see their biggest surge in sales.

Such cuts have compounded shortages caused by the two-month shutdown of the entire North American automotive production network in spring 2020 — along with similar closures abroad.

Dealers are feeling the pinch at a time of year when they normally see their biggest surge in sales. The industry likes to maintain an average of 60 to 70 days’ worth of products on dealer lots in order to ensure customers can quickly find the vehicle they’re looking for. But inventories are down to a 30-day average for showrooms operated by AutoNation, and are falling fast, Mike Jackson, the CEO of the country’s largest dealer chain, told NBC News.

Automakers and auto dealers have tried to compensate for those shortages by raising prices and curbing the incentives that, during the depths of the pandemic topped $10,000 on some pickups and other high-cost models.

There are as many as 1,400 chips in a typical 2021 automobile, according to Hearsch.

Manufacturers are looking for ways to cope. Where possible, they are shifting semiconductor supplies from low-volume products to high-profit models. 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 indefinitely.

“There are simply going to be instances where they won’t be able to get all the parts,” he noted.