Chip crunch into 2024 could fuel more profits for automakers
Automakers could be riding strong pricing from limited inventories because of the semiconductor shortage into 2024 — and they have no intentions of returning to the old ways.
An excess demand over the supply of new vehicles — crimped by too few microchips needed for electric components in vehicles from driving assistance functions to infotainment — drove average transaction prices to record highs in 2021, padding automakers' balance sheets and their workers' profit-sharing checks.
Conditions are likely to moderate this year, analysts say, but the constraints probably won't be resolved for another couple of years as the world awaits more capacity to come online.
"I don't think it's going to be until all the way to 2024 where inventories are back to pre-crisis levels," Colin Langan, lead automotive analyst for Wells Fargo & Co., said during an Automotive Press Association webinar in Detroit. "That's good news for the automakers that should see good pricing and great news for the dealers that will continue to see aboveaverage new vehicle margins."
Stellantis NV on Wednesday rode strong pricing and cost-cutting efforts to a $15.1 billion net profit in 2021, nearly triple the 2020 combined earnings of its predecessors, Fiat Chrysler Automobiles NV and French Groupe PSA. Its 11.8% adjusted operating margin exceeded its 10% forecast, despite losing about 20% of its planned production for the year.
The automaker is predicting another year with a double-digit margin in 2022, though just 3% growth in the North American market, which helped fuel last year's earnings.
"The size of the markets will be mostly managed by the supply of the semiconductors," CEO Carlos Tavares said during an earnings call. "We believe the situation is going to move in the right direction . ... Hopefully things will get better. It will be slow. It will take time. 2022 is not going to be, from that perspective, the year where we can say we're back to normal."
Stellantis' North American dealer inventory decreased by 186,000 units in 2021, sending average transaction prices in the Unites States up roughly 20% to around $47,000. There are signs of recovery, though: Globally, the automaker's inventory in December was down 59% year-over-year to 791,000 vehicles, but that was up almost 100,000 vehicles from September.
Consulting firm AlixPartners LLP found 8.2 million vehicles weren't produced last year because of the chip shortage as well as disruptions from semi and ship transportation and labor challenges. About 505,000 vehicles already have been lost this year, with Japan being hit the worst followed by North America and Europe. The result is 58% of last year's inventory, and vehicles being sold within three weeks or fewer.
Earlier this month, General Motors Co. reported it had made $10 billion in profit in 2021 and surpassed its forecast, while Ford Motor Co. met its guidance and posted a net income of $17.9 billion.
GM CEO Mary Barra at Wolfe Research Virtual Global Auto, Tech and Mobility Conference on Wednesday said GM will "never go back" to past inventory levels.
"We are working to build every single vehicle we can build because the demand is so strong," Barra said. "We do expect a favorable pricing environment to continue as inventories are going to take well beyond 2020 to rebuild."
Dan Hearsch, managing director in the automotive and industrial practice at AlixPartners, however, cautions against the idea of a "new normal."
"Automakers are really forced to cooperate with each other," Hearsch said of conditions today. "Nobody can cheat, because nobody can make enough vehicles to drive demand. When supply catches up, when things bounce, and then when demand does fall off, because this is a cyclical market and eventually it will fall off, then we'll get back to the more typical fluctuations."
Ford also has changed its retail model in response to the results seen in 2021. It's incentivized vehicle orders and wants them to account for a greater portion of U.S. sales — versus having customers buy off dealership lots — to keep pricing strong. Orders used to represent 5% of sales. In January, 37% of retail sales were orders.
But automakers do want more semiconductors to keep their plants running and get vehicles in the hands of customers.
"I was up until 11 o'clock last night — normal night for an auto executive these days. It's transient. It's frustrating. It's painful," Ford CEO Jim Farley said during the Wolfe Research conference. "Whether it's dealers or us, no one likes to have unfinished inventory sitting around. It is ungodly expensive and our industry has put up with that for far too long."
A snap freeze in Texas, a fire at a chip fabricator in Japan and pandemic-induced restrictions in Malaysia elongated the chip shortage last year. Companies now are ordering multiple times what they need in an effort to save their spot in line for the sought-after parts as wait times have increased 91%, according to AlixPartners.
The number used in vehicles has doubled since 2017, and electric vehicles use more than their engine-powered counterparts, according to IHS Markit Ltd. That could jeopardize the ramp-up of EVs, according to AlixPartners.
Ford is re-evaluating its entire portfolio in light of the situation, Farley said. In November, it signed a non-binding agreement to collaborate on production and technology advancements with semiconductor supplier GlobalFoundries Inc.