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Chip Dearth Forces Ford (F) to Curtail Production at Several Plants

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Ford Motor Company (F - Free Report) is significantly slashing vehicle production in several of the company’s North American factories for few weeks in July and August due to the global crunch in semiconductor supply.
The Dearborn-based automaker revealed recently that it plans to halt or trim production at eight plants, including six in the United States, during July and early August due to the semiconductor shortage.

This will result in the reduction of the production of several popular name plates by Ford, ranging from the Ford F-150 and Ford Bronco Sport to the Ford Mustang and Ford Explorer.

Per Ford, the latest production cuts are being done to prioritize completing customers’ vehicles that were assembled without chips due to the industry-wide semiconductor shortage. The company now is diverting its scarce semiconductor supply to finish the nearly-completed vehicles awaiting chips so that those can be dispatched to the dealers at the earliest.

Reportedly, the auto biggie’s Chicago assembly plant, where the Explorer sport utility vehicles (SUVs) are built, will be down from the week of Jul 5 to the week of Jul 26. Also, the unit will operate only two shifts during the Aug 2 week.

Ford also plans to halt the production line for few weeks in July at its Kansas City assembly plant where for one of its hot-selling vehicles, the F-150 pick-up truck, is manufactured.

Ford’s other plants where production will be down due to the chip crunch include the Dearborn Truck plant in Michigan, the Flat Rock Assembly plant in Michigan, the Hermosillo Assembly Plant in Mexico, the Kentucky Truck plant in Kentucky, the Louisville Assembly plant in Kentucky and the Oakville Assembly Complex in Ontario.

Semiconductors are silicon chips that perform control and memory functions, and are indispensable components of high-performing computer chips that power electronic devices like computers, mobile phones and other gadgets. With vehicles on the road becoming more like computers on wheels, automobiles are vastly automated, and require semiconductors for various applications, such as engine controls and automatic braking systems.

When the pandemic hit the economy, the auto sector bore severe brunt of the crisis, with auto sales hitting rock bottom in the second quarter of 2020. Amid the tanking auto sales, semiconductor manufacturers shifted their production capacities to other sectors such as consumer electronics.

Nonetheless, with the global economy gradually recovering from the mayhem caused by the pandemic, auto sales managed to rebound faster than anticipated, especially in China, the world’s largest car market. This encouraged major automakers to ramp up production and replenish weak inventories at dealerships.
However, semiconductor makers have been unable to meet the surging demand for automotive semiconductors and will take months to realign production to cater to this upswing in demand. This has caused a shortage of semiconductors in the auto sector and has proven to be a speed-bump for automotive sales. Reportedly, the ongoing semiconductor chip shortage is expected to hit revenues from the global automotive industry to the tune of $110 billion in 2021.

Ford, at the end of this April, had forecast a $2.5-billion hit to its 2021 earnings and a production loss of 1.1 million units during 2021, amid the acute chip shortage. Moreover, the automaker had predicted to lose roughly half of its vehicle production in the second quarter of 2021 due to the chip crisis. Nonetheless, the latest production cut by Ford is a sign that the supply-chain woes could take longer to wane out than previously anticipated.

Other automakers scrambling with this supply-chain issue include General Motors (GM - Free Report) , Toyota (TM - Free Report) and Honda (HMC - Free Report) .

Meanwhile, Ford’s Michigan Assembly plant, where the Ford Ranger pick-up and new Ford Bronco SUV, are built will be down for two weeks in July due to lack of certain auto parts that were unrelated to the chip shortage. Ford failed to disclose the parts that caused the shutting of the Bronco-Ranger factory.
The Bronco SUV had just begun production in the Michigan factory. The loss of Bronco production, which is not due to the chip shortage, comes in as a major blow to company’s most iconic model. Ford Bronco SUV received a massive positive response upon its debut last year. In fact, Ford claims to have received more than 125,000 bookings for the Bronco SUVs till date.

Ford currently carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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