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August 8, 2022
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Automotive chips crisis likely to continue next year

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu

The silicon chips crisis is continuing, analysts predicting that even if production will rebound to normal levels, carmakers production will not return to normal due to the need to refill depleted stocks and the increase in number of chips needed for the smart cars. For now, the lack of chips forced car factories around the world to slow or stop production with one notable exception: Tesla.

The Romanian cars production decreased in September to 29.077 units from 57.846 units in the same month last year. This decrease is due to the lack of silicon chip forcing the largest local manufacturer, Dacia, part of Renault group (RNL) to stop the production for seven days. Production stops continued in October too. Also the lack of components forced Dacia to deliver cars to France without central locks that will be retrofitted if required.

Volkswagen (VWAGY), the largest European carmaker saw its group operations impacted by “the global semiconductor bottlenecks” in the third quarter, forcing it to pause production at some of its plants due to missing components. Vehicle deliveries were down 24 percent, while demand in key market China “could also not be met”, VW said. The group earnings fell 12 percent to 2.8 billion euros ($3.2 billion) in the last Quarter. By contrast, bottom-line net profit rose by 5.6 percent to 2.9 billion euros due to strong demand with not enough supply that led to lack of discounts and increased prices.

General Motors (GM) – owner of Chevrolet, Cadillac, Buick and GMC, among others – Ford (F) and Stelantis – owner of Fiat-Chrysler and Peugeot-Citroen – presented a similar situation with production shortfalls due to lack of chips. In order to meet demand, car manufacturers are stripping some features of their cars, some permanently some to be retrofitted when the chips will be available.

Like VW, Stellantis reported a production decrease of about 600.000 vehicles in the last quarter that led to a 27% drop in shipments. “The level of shortage was slightly higher than we expected in August,” acknowledged Stellantis’s chief financial officer, Richard Palmer. Volkswagen had a drop in customer deliveries of 24 percent, Ford sales dropped 27 percent and GM nearly a third.

Toyota (TM), the largest global car manufacturer, is set to cut global car production for the third time in November, but the firm expects to have its most productive November ever. Output is also expected to recover from December onwards, though six of its 28 factory lines are expected to close in November, including four in Japan. Toyota previously cut production by 40% in September because of the global semiconductor shortage and Covid-19 impacts in Asia.

As opposed to traditional carmakers, forced to stop production due to lack of parts, Tesla (TSLA) is basically running at full capacity. The company delivered 241,300 electric vehicles during the third quarter of 2021 up about 73% compared with the third quarter of 2020, and posted record profits. Though not without its share of delayed deliveries, Tesla managed to outrun the chips crisis because its vehicles use fewer parts and chips. Moreover, Tesla was able to adapt by rewriting the software to use different chips that were available. Also, though being the most valuable automotive company, recently reaching over a trillion market value, Tesla production is way smaller than the other car manufacturers making it easier and more profitable for the chip foundries to supply them.

On the foundries front, the companies manufacturing the needed chips, GlobalFoundries (GFS) IPO raised 2.6 Billion USD, making the listing the third biggest on a U.S. exchange this year. Taiwan Semiconductor Manufacturing Company (TSM), the largest foundry in the world, is planning to build a factory in Japan that is scheduled to start production in 2024 as part of a broader global push by the chipmaker as governments around the world call for semiconductor production to be brought on shore for economic and national security reasons. The company estimated that throughout 2022 the supply of chips will still be tight.

How will the chip crisis evolve? Some consultants see the shortage of computer chips to block the production of 7.7 million vehicles resulting globally in 180 billion euros ($210 billion) in lost revenue this year. The automakers are positive that the crisis will ease with time. GM CEO Barra declared that she has seen an improvement in semiconductor production, which will lead to stronger supply in Q4 and in Q1 next year. The industry was “through the worst” of the chip crisis, believes the Volkswagen CEO Diess, predicting the situation would improve in the fourth quarter, even if “constraints” would continue into 2022. Building capacity to meet higher demand for the group’s vehicles would “take time”, Diess said, noting that the number of semiconductors per car was increasing by seven percent a year.

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Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.

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