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Here's Why Auto Industry Recovery is Likely to Lose Steam
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The coronavirus pandemic dealt a massive blow to the auto industry last year, with factory closures, low footfall at dealerships and economic uncertainty. While the industry was looking to recover from the COVID-19-induced damage and resume operations at pre-pandemic levels, it is now facing another speed bump in the form of a shortage in the supply of semiconductors.
Chip Crunch - A Killjoy
Amid rapid digitization in the auto industry, vehicles now have a voracious appetite for semiconductor chips, thanks to features like in-car entertainment, and bluetooth connectivity, among others. With vehicles on the road becoming more like computers on wheels, automobiles are getting vastly automated and require semiconductors for various applications like engine controls, as well as automatic braking systems.As a matter of fact, the more technologically advanced a vehicle, the more semiconductors it requires.
Amid coronavirus-led sluggish demand and lockdown restrictions last year, automakers around the world temporarily shut operations for multi weeks and cut down on chip orders. While carmakers slammed brakes on chip orders, electronic manufacturers — which witnessed significant demand uptick amid the pandemic situation — snapped up excess supply.
Meanwhile, pent-up demand, easier credit conditions and preference for private transportation amid the socially-distant environment resulted in faster-than-expected rebound of vehicle sales. Just when things started looking up for the auto industry, mounting shortage of semiconductors has again left the industry in disarray.
Semiconductor makers are seemingly not able to meet the surging demand for automotive chips, so much so that carmakers are now scrambling to procure semiconductors, which are forcing them to undergo production cuts. Global chip deficit has hit the industry at the worst possible time. At a time when automakers are concentrating on replenishing the inventory of vehicles, which witnessed a decline due to faster-than-expected vehicle demand, production cuts would further dry up the same.
Auto Biggies Bemoan Semiconductor Supply Deficit
Various auto biggies are battling semiconductor supply deficit, which is hindering their business operations and forcing them to idle production lines across the world.
U.S. auto giant General Motors (GM - Free Report) has temporarily shuttered production at plants in Kansas, Canada and Mexico through mid-March. It has also cut production at a plant in South Korea, which will now operate at half capacity. While the company does not expect production cuts in its highly profitable trucks and SUVs, it has warned that pretax profits might take a $1.5-$2 billion hit, thanks to the shortfall of semiconductor chip. General Motors currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
General Motors’ closest peer, Ford (F - Free Report) has been forced to cut production at Michigan and Missouri plants that build its profitable F-150 trucks. Prior to that, it temporarily shut operations in the Louisville plant in Kentucky, which produces Escape and Lincoln Corsair SUV models. Production at the firm’s plants in Chennai and Gujarat, India has also been impacted. Importantly, Ford estimates the chip shortage to slash output up to 20% in first-quarter 2021. It expects the global semiconductor shortage issue to prevail through first-half 2021, which is likely to affect near-term earnings. The company anticipates the chip issue to adversely impact 2021 adjusted EBIT to the tune of $1-2.5 billion.
Japan-based auto biggies including Honda (HMC - Free Report) and Nissan (NSANY - Free Report) are also reeling under the chip famine. Both the companies were forced to slash production targets for the January-March quarter. While Honda has trimmed its sales target by 100,000 units, Nissan has cut global sales outlook by 150,000 vehicles. Among other models, production of Honda’s Fit and Jazz models, along with Nissan’s hot-selling Note compact car will be affected. Apart from short-term production cuts at plants in Japan, both the companies have also been forced to make adjustments in their operations in North America. Meanwhile, Japan’s biggest automaker Toyota (TM - Free Report) does not expect the global chip shortfall to impact near-term production. While the company does acknowledge the risks associated with semiconductor shortage, it claims to have up to four-month stockpile of chips.
Stellantis N.V. (STLA - Free Report) , formally known as Fiat Chrysler, suspended factories in Brampton, Ontario and Toluca, which in turn affected models like Jeep Compass, Chrysler 300, as well as Dodge Charger and Challenger. The chip shortage has forced Stellantis to furlough about 1,800 local workers, with the halt of the production of its popular Jeep Compass.
In December 2020, Germany’s biggest automaker, Volkswagen (VWAGY - Free Report) disclosed its intention to modify production in China, Europe and North America amid chip supply bottleneck. Models based on the MQB platform including ŠKODA, SEAT, and other commercial as well as passenger vehicles will be affected. Volkswagen’s peer and Mercedes-maker Daimler was also forced to cut production in Rastatt and Bremen plants.
Brace for a Rough Road Ahead
Well, the chip shortage has been forcing most of the automakers to cut production and furlough workers, and the list is only likely to grow as it would take months to realign production to cater to this upswing in demand. With the production coming to a halt, consumers are likely to have a hard time in finding new vehicles and specific models at dealerships. The shortage of semiconductor supply is certainly proving to be a roadblock in the auto industry’s recovery and will deal a massive blow to vehicle production, especially in first-half 2021. Per IHS Markit, the chip constraint will result in the production of 672,000 fewer vehicles in first-quarter 2021 alone. It expects the industry to grapple with the shortage of semiconductor chips till third-quarter 2021, with the deficit costing the auto sector around $61 billion.
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Image: Bigstock
Here's Why Auto Industry Recovery is Likely to Lose Steam
The coronavirus pandemic dealt a massive blow to the auto industry last year, with factory closures, low footfall at dealerships and economic uncertainty. While the industry was looking to recover from the COVID-19-induced damage and resume operations at pre-pandemic levels, it is now facing another speed bump in the form of a shortage in the supply of semiconductors.
Chip Crunch - A Killjoy
Amid rapid digitization in the auto industry, vehicles now have a voracious appetite for semiconductor chips, thanks to features like in-car entertainment, and bluetooth connectivity, among others. With vehicles on the road becoming more like computers on wheels, automobiles are getting vastly automated and require semiconductors for various applications like engine controls, as well as automatic braking systems.As a matter of fact, the more technologically advanced a vehicle, the more semiconductors it requires.
Amid coronavirus-led sluggish demand and lockdown restrictions last year, automakers around the world temporarily shut operations for multi weeks and cut down on chip orders. While carmakers slammed brakes on chip orders, electronic manufacturers — which witnessed significant demand uptick amid the pandemic situation — snapped up excess supply.
Meanwhile, pent-up demand, easier credit conditions and preference for private transportation amid the socially-distant environment resulted in faster-than-expected rebound of vehicle sales. Just when things started looking up for the auto industry, mounting shortage of semiconductors has again left the industry in disarray.
Semiconductor makers are seemingly not able to meet the surging demand for automotive chips, so much so that carmakers are now scrambling to procure semiconductors, which are forcing them to undergo production cuts. Global chip deficit has hit the industry at the worst possible time. At a time when automakers are concentrating on replenishing the inventory of vehicles, which witnessed a decline due to faster-than-expected vehicle demand, production cuts would further dry up the same.
Auto Biggies Bemoan Semiconductor Supply Deficit
Various auto biggies are battling semiconductor supply deficit, which is hindering their business operations and forcing them to idle production lines across the world.
U.S. auto giant General Motors (GM - Free Report) has temporarily shuttered production at plants in Kansas, Canada and Mexico through mid-March. It has also cut production at a plant in South Korea, which will now operate at half capacity. While the company does not expect production cuts in its highly profitable trucks and SUVs, it has warned that pretax profits might take a $1.5-$2 billion hit, thanks to the shortfall of semiconductor chip. General Motors currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
General Motors’ closest peer, Ford (F - Free Report) has been forced to cut production at Michigan and Missouri plants that build its profitable F-150 trucks. Prior to that, it temporarily shut operations in the Louisville plant in Kentucky, which produces Escape and Lincoln Corsair SUV models. Production at the firm’s plants in Chennai and Gujarat, India has also been impacted. Importantly, Ford estimates the chip shortage to slash output up to 20% in first-quarter 2021. It expects the global semiconductor shortage issue to prevail through first-half 2021, which is likely to affect near-term earnings. The company anticipates the chip issue to adversely impact 2021 adjusted EBIT to the tune of $1-2.5 billion.
Japan-based auto biggies including Honda (HMC - Free Report) and Nissan (NSANY - Free Report) are also reeling under the chip famine. Both the companies were forced to slash production targets for the January-March quarter. While Honda has trimmed its sales target by 100,000 units, Nissan has cut global sales outlook by 150,000 vehicles. Among other models, production of Honda’s Fit and Jazz models, along with Nissan’s hot-selling Note compact car will be affected. Apart from short-term production cuts at plants in Japan, both the companies have also been forced to make adjustments in their operations in North America. Meanwhile, Japan’s biggest automaker Toyota (TM - Free Report) does not expect the global chip shortfall to impact near-term production. While the company does acknowledge the risks associated with semiconductor shortage, it claims to have up to four-month stockpile of chips.
Stellantis N.V. (STLA - Free Report) , formally known as Fiat Chrysler, suspended factories in Brampton, Ontario and Toluca, which in turn affected models like Jeep Compass, Chrysler 300, as well as Dodge Charger and Challenger. The chip shortage has forced Stellantis to furlough about 1,800 local workers, with the halt of the production of its popular Jeep Compass.
In December 2020, Germany’s biggest automaker, Volkswagen (VWAGY - Free Report) disclosed its intention to modify production in China, Europe and North America amid chip supply bottleneck. Models based on the MQB platform including ŠKODA, SEAT, and other commercial as well as passenger vehicles will be affected. Volkswagen’s peer and Mercedes-maker Daimler was also forced to cut production in Rastatt and Bremen plants.
Brace for a Rough Road Ahead
Well, the chip shortage has been forcing most of the automakers to cut production and furlough workers, and the list is only likely to grow as it would take months to realign production to cater to this upswing in demand. With the production coming to a halt, consumers are likely to have a hard time in finding new vehicles and specific models at dealerships. The shortage of semiconductor supply is certainly proving to be a roadblock in the auto industry’s recovery and will deal a massive blow to vehicle production, especially in first-half 2021. Per IHS Markit, the chip constraint will result in the production of 672,000 fewer vehicles in first-quarter 2021 alone. It expects the industry to grapple with the shortage of semiconductor chips till third-quarter 2021, with the deficit costing the auto sector around $61 billion.
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Click here to download this report FREE >>