Put in park: How a tiny chip wounded the US auto industry

General Motors employees work on the assembly line Friday, April 26, 2019 at Fairfax Assembly & Stamping Plant in Kansas City, Kansas. Fairfax Assembly & Stamping Plant in Kansas City, Kansas, has been down since early February because of the chip woes. (Jim Barcus/General Motors/TNS)
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Jordyn Grzelewski, Kalea Hall and Riley Beggin The Detroit News (TNS)

The global semiconductor chip shortage arguably is unlike anything the automotive industry has weathered. It is poised to drag on for months longer, cutting into the profits of automakers and their suppliers, delivering uncertainty and lost wages to autoworkers, and giving consumers fewer choices and higher prices on dealership lots.

The crisis — compounded by production issues tied to the coronavirus pandemic — could result in about 2.5 million fewer vehicles being built this year than planned and level a more than $61 billion hit to the industry, according to a forecast from global consulting firm AlixPartners.

At least 70,600 autoworkers have faced shutdowns and shift reductions at U.S. assembly plants represented by the United Auto Workers, according to the Ann Arbor-based Center for Automotive Research, part of more than 50 plants affected in North America by the shortage of chips used in everything from infotainment systems to power steering.

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The vital components are sourced primarily from Taiwan and other parts of Asia. The lengthening crisis is stoking anxieties and causing last-minute scheduling inconveniences, creating headaches with overburdened state unemployment offices, and swelling lost wages for those laid off for extended periods.

“I would prefer to be at work than to have this uncertainty hanging,” said Justin Mayhugh, an autoworker at General Motors Co.’s Fairfax plant in Kansas, which produces the Cadillac XT4 and Chevy Malibu and has been down since early February because of the chip woes.

The shortage of essential components that power many of the automated and electronic features in vehicles has exposed strengths and weaknesses within the industry, with some automakers like GM managing to mostly insulate their high-margin products from being impacted while such rivals as Ford Motor Co. cut production of even their most valuable vehicles.

The situation has become so dire that the Dearborn automaker has parked hundreds of its profit-driving F-150 pickups in a Detroit parking lot along I-96, among other places, until it can get enough chips to finish them.

A perfect storm of factors combined amid the onset of the COVID-19 pandemic last year. It was exacerbated in the ensuing months by winter storms in the U.S., a fire at a critical chip factory in Japan and surging demand for new pickups, crossovers and SUVs.

Meanwhile, experts say the crisis is likely to drag on for months — and longer-term solutions are years away. The lingering problem has major implications for Michigan, where deflated financial results — the latest of which the Detroit automakers will begin reporting this week — will mean reduced executive bonuses and hourly profit-sharing payouts from a sector that contributes billions of dollars to the state’s economy.

Brian R. Peterson, director of public policy and economic analysis for Lansing-based Anderson Economic Group LLC, said in a note that there’s not yet enough data to discern the impact on unemployment levels, but “there will almost certainly be some type of impact on the state’s economy if this continues.”

“A reduction in pay would mean these workers would have less disposable (income) to spend on goods and services in the state’s economy, which could impact jobs in other sectors,” he said. “Secondly, jobs throughout the automotive supply chain could be affected as well if automakers reduce the amount of parts they are ordering because they are making fewer cars.”

The shortage’s consequences are far-reaching. According to Goldman Sachs, the crunch affecting some 169 industries in the U.S. could reduce GDP as much as 1% this year.

“It’s a global issue, so there’s no place to hide,” said Dave Andrea, principal and member of the automotive strategy consulting team at Southfield-based accounting firm Plante Moran. “There’s no offset to this, and that’s the issue that comes back to hurt at the corporate level.”

Production disruptions

The shortage is not hurting all automakers equally.

AutoForecast Solutions estimates that through April 23, GM — the No. 1 U.S. automaker — has lost more than 197,400 planned vehicles in North America, including more than 47,000 midsize trucks and commercial vans made at its Wentzville, Missouri, plant. GM’s Fairfax Assembly plant in Kansas has been down since February and lost more than 45,000 vehicles of the Cadillac CT4 and Chevrolet Malibu it builds. The automaker has mostly been able to protect its full-size truck and SUV plants.

The automaker could lose more than 243,000 planned vehicles, according to AutoForecast Solutions.

Meanwhile, the firm estimates that No. 2 U.S. automaker Ford — which last week announced downtime extensions at several key plants — has lost more than 229,400 vehicles of its North American volume, including more than 40,500 F-150s built at the automaker’s Kansas plant. Ford’s Dearborn plant also lost production of more than 19,200 planned F-150s and F-150 Raptors. The forecasting firm estimates the automaker could lose more than 296,300 planned vehicles in North America.

The transatlantic automaker Stellantis NV has lost more than 157,500 planned vehicles in North America, including more than 32,000 of its Chrysler and Dodge minivans and more than 42,000 Jeep Compasses, through April 23, according to the data. The firm projects Stellantis could lose more than 182,800 planned vehicles in North America.

The constraint is not limited to Detroit — automakers the world over have been affected. Britain’s Jaguar Land Rover, for example, recently announced production disruptions at some of its facilities in the United Kingdom. And German automaker Daimler AG, parent of Mercedes-Benz, said last week it would cut the hours of up to 18,500 workers and halt production at two plants in Germany.

Honda Motor Co. has lost more than 42,900 units of its North American production, according to AutoForecast Solutions estimates from April 23, and could lose more than 72,200 units. Toyota Motor Corp. has lost more than 23,600 units in North America and could lose more than 26,100. Volkswagen AG has lost more than 27,900 units in North America and could lose more than 42,000 units.

Even in normal times, automakers have varying levels of output that depend on product demand. Larger automakers with more volume stand to lose more units because they make more, but experts stress it’s not just about volume but the profitability of the vehicles affected.

Experts point to Ford as an automaker that has struggled to protect its most profitable vehicles from production disruptions.

The Dearborn automaker — which has said that its yearly earnings could take a hit of between $1 billion and $2.5 billion if the shortage extends through the first half of the year — in some cases has built F-150s and other vehicles in North America without some electronic modules that contain semiconductors, opting to hold the incomplete vehicles until missing parts can be added and the vehicles can be inspected.

“These trucks are the key to the company’s profits, and having them sit in parking lots does nothing for their bottom line,” said Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions.

GM, too, has in some cases built vehicles and then set them aside. In other cases, it has opted to build and ship them without non-essential computer-controlled features. For example, the automaker said last month that it would build certain 2021 light-duty full-size pickup trucks without a fuel management module, thereby decreasing the fuel economy.

“Keeping the plants running, keeping product getting to market is really, really, really critical, because inventory levels at dealerships right now … they’re extremely low,” said Dan Hearsch, managing director at AlixPartners. “Having your vehicles available for sale is a huge opportunity and competitive advantage.”

The firm expects the shortage will peak this quarter, then begin to ease around the third quarter. Some of the lost volume could be made up starting late this year, with strong demand expected to fuel recovery next year.

Meanwhile, the CEO of chipmaker Intel Corp. has warned the shortage could take years to resolve, though the company is trying to boost production of automotive chips within six to nine months to help ease the situation. And Taiwan Semiconductor Manufacturing Co., the world’s largest semiconductor foundry, has said that while conditions will improve in the meantime, it expects the shortage to extend into 2022.

Effects trickle down

Mayhugh, 37, works at GM’s Fairfax Assembly in Kansas, where the Cadillac XT4 SUV and Chevrolet Malibu are built. The plant has been down since the week of Feb. 8; GM expects to restart production there the week of May 10.

Mayhugh hasn’t struggled financially yet because of the shutdown but knows others who have had to wait for unemployment compensation — an issue that has plagued laid-off workers in Michigan and other states as government unemployment offices have struggled to keep pace with the deluge of pandemic-fueled filings.

The extra $300 federal unemployment assistance during the pandemic makes Mayhugh’s unemployment checks about $780 weekly when he typically takes in about $850 when working.

At the start of the layoff, Mayhugh said, “You’re like OK, it’ll be good to spend time with friends and family and relax.” But with the plant down for nearly three months so far, “people are past that now.”

“When you’re first out when you get laid off, you’re not thinking it’s gonna last months and months,” he said. “It just seems crazy that GM can’t get this microchip, but then again … everything is outsourced.”

“If one thing happens anywhere in the various places they have all these parts this is what happens,” he said. “Obviously, they’re saving money by running it this way, but at what cost?”

The pay and benefits hourly autoworkers receive during plant downtime are spelled out in the Detroit automakers’ collective bargaining agreements with the United Auto Workers.

GM, Ford and Stellantis declined interview requests on how they’re managing production, but all noted that temporarily laid-off employees who meet certain criteria based on their position and length of service would receive state unemployment benefits and possibly supplemental unemployment benefits paid by the companies. Other benefits typically remain intact during temporary layoffs.

GM has said the microchip shortage could deliver a $1.5-$2 billion hit to its free cash flow for the year. The Detroit automaker is shutting down production at other plants to protect its most popular and profitable products: full-size trucks and SUVs. Its midsize truck plant in Wentzville, Missouri, however, did see two weeks of downtime.

Ford CEO Jim Farley, speaking last week at an Automotive News event, called the chip shortage “perhaps the greatest supply shock” he’s ever seen, and said the issue has prompted the company to rethink its sourcing strategies.

For prospective vehicle buyers, the shortage has meant two things: fewer choices at dealerships and higher prices. According to auto information website Edmunds.com, new vehicle inventory at dealerships nationwide was down 36% year-over-year in March. And the average transaction price for a new vehicle ticked up to $39,950 last month, about 3% higher than a year prior.

It’s been a mixed bag for auto dealers, too.

“Right now, you’re thinking, ‘Boy, it’s a great time to be a dealer because transaction prices are up,” said Jim Walen, owner of Chrysler Dodge Jeep Ram of Seattle and Hyundai of Seattle. “But on the other side of it is really tough to get inventory and to get the right inventory, used car prices are super high, and on the used cars side, there’s more competition than ever.”

The fallout has been felt up and down the automotive supply chain, too, with suppliers bearing some of the cost.

“If you’re not building a vehicle because of an electronic shortage,” said Plante Moran’s Andrea, “you also don’t need plastic front fascias, so those guys are starting and stopping and that adds a lot of margin pressure.”

Time is of the essence

President Joe Biden is taking the shortage seriously, ordering an expedited review of the supply chain for semiconductor chips and convening a meeting of major automakers, chip producers and tech companies to discuss the issue.

Despite the fanfare, industry experts agree: There’s not much the federal government can do to ease the chip crunch in the short term.

What’s needed long term is straightforward, experts say: more capacity. But it will take time and major investments if policymakers and industry leaders want to boost the U.S.’s share of chip manufacturing, which stands at about 12%.

Numerous chipmakers, including Intel and TSMC, are planning major investments to boost their production in the U.S. — but with construction on such facilities typically taking about two years, more permanent relief remains further down the road.

“These plants need a long time to come up to speed,” Fiorani said. “You can’t just turn the Titanic that quickly.”

Biden has proposed $50 billion to beef up semiconductor manufacturing in the U.S. through the jobs and infrastructure package being debated in Congress. Political divisions over the package complicate its path forward and, even if successful, it’s not expected to pass quickly enough to immediately ease automakers’ pain.

“We’ve got to get the capacity thing squared away,” said Phil Amsrud, an analyst for IHS Markit’s automotive semiconductor research area. “There’s both a short-term project that gets us through this year, and then there’s going to be a longer-term project of, ‘What lessons did we learn to improve things going forward?’ And then there’s trying to figure out how much of the demand signals are real and how much of the demand signals are going to evaporate once supply gets back in line.”

And though experts say there are far too few semiconductor plants at the moment for demand issues to be a pressing concern, some caution that it will be a balancing act to determine how much capacity is truly needed given that the current crisis is due largely to a supply and demand imbalance brought on by the pandemic.

“There’s a need to be careful to not go over capacity and end up losing money for everyone,” said Stephanie Brinley, an automotive analyst at IHS Markit. The industry should work on building more redundancies into the system to be better prepared in the future, she said, “but you don’t simply want to double your number of plants in case you go down like that again.”

Still, time is of the essence, Fiorani said. The U.S. auto industry is in a race with Asian and European manufacturers for a piece of the future electric vehicle market, and everyone is eager to bring more production to the U.S.

“The automotive industry encompasses a huge portion of our domestic GDP, and it trickles down from the manufacturers to the suppliers to the material suppliers to the local restaurants near assembly plants,” he said. “If we can’t build vehicles here, everybody gets hurt.”

Lessons learned

Experts agree a lesson from this crisis is that automakers need to have greater visibility down their supply chains. Some automakers were caught off guard by the shortage, a sign that manufacturers don’t always look beyond their top-tier suppliers.

And short of boosting capacity, other strategies to help mitigate future supply crunches could include automakers expanding their supply bases, becoming more flexible in the types of chips they use, and inking longer-term agreements with suppliers — though the industry’s just-in-time approach to sourcing and manufacturing is unlikely to go away.

The crisis is likely to prompt wholesale reassessments of how automakers and their suppliers source components, experts say. And greater flexibility will be key to navigating supply constraints that will come with the industry’s transition to electric and autonomous vehicles.

The semiconductor issue, in particular, could intensify as automakers roll out more technologically advanced vehicles — advancements that are expected to fuel demand even as they require more sophisticated chips that fewer companies can make.

“Today, every automaker in the world … is investing billions in accelerating the pace of innovation, and that means a need for ever more powerful chips,” said Michael Dunne, CEO of Hong Kong-based advisory firm ZoZo Go LLC. “I see this as being a chronic issue for the next five years, as chip manufacturing races to catch up with the new technologies.”

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