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Carmakers Hurt as Renesas Fire Breakout Compounds Chip Concerns

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The auto industry is currently facing a major crisis in the form of shortage in the supply of semiconductors. Various auto biggies are grappling with semiconductor supply deficit, which is hindering their business operations and forcing them to idle production lines across the world. Global chip deficit has hit the industry at the worst possible time. At a time when automakers were focusing on replenishing the inventory of vehicles, which witnessed decline due to faster-than-expected vehicle demand, production cuts are aggravating the scenario further.

The fire breakout at a Renesas Electronics chip plant last Friday has only exacerbated the chip famine. The timing of the incident could not be worse as the industry is already in disarray due to semiconductor supply woes and unusually cold weather thathas forced several automakers to curb output. Being one of the largest chipmakers for the auto industry, Renesas believes that the mishap would have a massive impact on chip supplies as the operations at the affected plant is expected to remain shuttered for at least a month. The firm’s CEO Hidetoshi Shibata estimatesahit of around $156 millionin revenues due to the incident.

Notably, about two-thirds of the affected production was automotive chips. While the chips affected by the fire breakout could be built elsewhere but Shibata is of the opinion that finding alternatives will prove to be extremely difficult amid the lack of additional chip production capabilities in various foundries including that of Taiwan Semiconductor Manufacturing Co, which is the largest chipmaker.

Most of the automakers including Renesas’ key customers like Toyota (TM - Free Report) , Honda (HMC - Free Report) and Nissan (NSANY - Free Report) are trying to assess the fallout from this recent speed bump. While Honda and Nissan were forced to slash production targets earlier this year amid the acute shortage of microchips, Toyota fared better as it had secured additional stockpiles of chips that would last the automaker at least till the end of ongoing quarter. Fire at Renesas plant is likely to impact Toyota’s output but nothing has been officially stated by the company yet. Notably, Toyota—which currently sports a Zacks Rank #1(Strong Buy)— is one of the key customers of Renesas, with the latter generating around 6.6% of its sales from the Japanese auto giant. Last Friday, the Japanese auto giant announced its intention to suspend operations at its factory in Czech Republic for two weeks owing to supply chain disruptions. You can see the complete list of today’s Zacks #1 Rank stocks here.

The stoppage at one of Renesas’ largest plants is set to worsen the global chip crunch. Notably, Renesas accounts for around 30% share of the global market for microchips used in automobiles. Given the current semiconductor supply issues, most of the auto biggies including General Motors (GM - Free Report) , Ford (F - Free Report) , Volkswagen (VWAGY - Free Report) and Daimler AG (DDAIF - Free Report) will be hit by latest setback.

It should be noted that the auto industry is estimated to lose $61 billion of 2021 sales from chip shortages. The IHS Markit expects the industry to grapple with the shortage of semiconductor chips at least till third-quarter 2021. While the chip supply is expected to meet demand by the third quarter, it is unlikely to make up for the lost production volumes through first-half 2021. Nonetheless, looking at the present scenario, it’s anybody’s guess how long will it take for the auto industry to recover from the chip crisis.

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