Chip shortage to cut into earnings at Ford and GM

The global semiconductor shortage will slash automotive earnings at General Motors Co. and Ford Motor Co. by about one-third this year as supply constraints hamper production and profits, Moody's Investor Service estimates.

The chip shortage will materially erode margins and could lower expected automotive earnings before interest and taxes by as much as US$2 billion for GM and US$2.5 billion for Ford, the ratings agency said in a note published Tuesday. GM's EBITA margin could fall to 3.4 per cent, while Ford's could dip as low as 1.8 per cent, according to Moody's. The ratings agency did not include profits from the finance units and equity income from Chinese operations in its estimates.

Rising demand for the chips needed to build technologically advanced and connected vehicles has introduced a new set of challenges for the North American auto industry, with shortages triggering production cuts and temporary plant closures, Moody's said. Demand from consumer-electronic companies exacerbated the supply shortages amid the coronavirus pandemic.

Next week, Ford will idle an assembly plant in Ontario, where it builds Edge and Lincoln Nautilus sport utility vehicles. The company said that plant will shut for a week due to the chip shortage, the latest in a series of temporary shutdowns and line slowdowns caused by the lack of semiconductors.

The situation could deteriorate further after weather-related challenges in large parts of the country added to the component shortage, Bill Rinna, director of vehicle forecasts at LMC Automotive wrote in a report. North American production is likely to be hit hardest in the first quarter, with pockets of disruption emerging to a lesser extent in the second quarter, he said.

LMC reduced its production forecast by over 250,000 units, with the possibility of another 100,000 units lost, for the first quarter, Rinna said. The production loss across North America as of mid-February is estimated to exceed 190,000 units, he said.

“We do not see inventory returning to normal levels until the fourth quarter of this year, or the early part of next year,” Rinna wrote.