Microchip shortage lingers
Low inventories mean big profits for carmakers, less buyers choice
DETROIT — Strong consumer demand is keeping Detroit’s three automakers optimistic about second-half profits even as a global microchip shortage is expected to extend into next year amid rising cases of the more-contagious COVID-19 delta variant.
The downsides for consumers: rising transaction prices and, in many cases, longer wait times for new vehicles — a trend that is resulting in longer-term auto loans, higher prices for used-car buyers priced out of new vehicles and frustrating delays landing one of Detroit’s hot new products.
Waits often snarled by supply-chain disruptions can be long, as Jamie MacDonald, 48, of Eaton Rapids, Michigan, discovered after reserving a new Ford Bronco last July: “It’s just crazy. I’ve moved a vacation based on an anticipated delivery window. Here I am over a year later. I have no clue what’s going on.”
After realizing the benefits of maintaining lower inventories, the Detroit automakers are looking to make permanent some of the changes prompted by the pandemic. Smaller supply means automakers don’t have to offer so much in costly incentives. And dealers can keep inventory costs lower, effectively limiting options and forcing customers to likely order a vehicle to get exactly what they want.
“It’s good to not have the expense of holding a lot of extra inventory and the expense associated with that,” said Jeff Laethem, president of Ray Laethem Motor Village in Detroit. “It’s bad for customers looking for variety and looking to be instantly gratified.”
The numbers tell the tale. General Motors Co. said it now expects fullyear pretax profits to be between $11.5 billion and $13.5 billion, up from the $10 billion to $11 billion previously given.
The Detroit automaker reported record pretax profit of $4.1 billion in the second quarter, including warranty recall costs of $1.3 billion, of which $800 million were related to the Chevrolet Bolt EV recall. Pretax profits were $8.5 billion in the first half.
Stellantis NV upped its projected adjusted operating margin for the year to 10% from between 5.5% to 7.5%, assuming no further deterioration in semiconductor supply and COVID19 lockdowns in Europe and North America.
And despite losing about half its planned production volume for the second quarter, Ford Motor Co. reported better-than-expected second-quarter results and revised upward its outlook for the full year by $3.5 billion. It now expects adjusted pretax earnings of between $9 billion and $10 billion.
Automakers across the globe are working through a chip shortage that has eaten into inventories even as demand soars. That shortage likely will continue into 2022, but all three expressed confidence in their ability to execute in the second half, even with the current headwinds.
“We continue to monitor COVID very carefully, and factor that in and look for what the potential might be from a COVID perspective especially with the new delta variant,” GM CEO Mary Barra said. “We do believe that, with the strong performance and the work that our teams do, we can deliver these results.”
GM reported net income of $5.85 billion for the first half of the year. Rivals Ford reported $3.8 billion for the first half and Stellantis reported $7 billion.
Earlier this year, GM said it expected a $1.5 billion to $2 billion hit on earnings from the chip shortage, but CFO Paul Jacobson did not quantify the impact when asked on an earnings call, saying instead that the chip issues presented a “lost opportunity” for “even better” results.
The chip shortage, though cutting current production including fullsize trucks, is not expected to affect the upcoming electric-vehicle launches of the Hummer EV truck later this year, EV600 delivery van by BrightDrop and the Cadillac Lyriq next year, Barra said.
“The chip shortage remains an overhead for GM and other automakers, but ultimately this quarter was another step in the right direction for Barra and the team,” Wedbush Securities analyst Dan Ives said in a statement. “Demand looks robust and ultimately this is an EV conversion story over the coming years with all targets appearing on or possibly ahead of schedule.”
Others in the industry, however, are not as optimistic as the Detroit Three about the second half of the year.
BMW AG on Tuesday kept its adjusted operating margin projection between 7% to 9%, expressing concerns over the microchip scarcity and increasing prices of raw materials like aluminum and steel.
“We’ve seen some additional challenges in the last couple of weeks,” Nicolas Peter, BMW’s chief financial officer, said during an earnings presentation. “Will this materialize? Let’s see.”
Worldwide, Stellantis had 772,000 vehicles on dealer lots at the end of June. It globally lost 20% of planned production, or about 700,000 vehicles, in the first six months of 2021 because of unfilled semiconductor orders.
North American dealer inventories were hit the hardest, decreasing by 104,000 vehicles from December.
“We feel pretty good about the fact that first half to second half, semiconductors should not get worse, although obviously we need to caveat that with the lack of visibility, frankly, within the supply chain, so there were some discrete events in H1,” Richard Palmer, Stellantis’ chief financial officer, said during an earnings presentation. “Malaysia continues to be a problem for us and others coming into the beginning of this quarter.”