A General Motors worker in Lansing, Mich. The company reports its earnings on Wednesday.
Bill Pugliano/Getty ImagesThe global semiconductor shortage is entering a new. more serious phase, with the potential to do damage to the stock prices of car manufacturers. Investors will have to separate the winners from the losers.
Auto stocks are on a tear. Shares of General Motors (ticker: GM) and Ford (F) were up 33% and 29%, respectively, since the start of the year on Tuesday afternoon. Volkswagen stock (XE: VOW) had risen 50%, while the S&P 500 was up about 10%.
Yet many auto plants have had to shut down unexpectedly, costing the companies billions of dollars in profit. Anyone who thought the problem might pass quickly is being proven wrong, partly because a fire at a Japanese factory in March is snarling supply chains just as demand takes off. The Chinese EV maker NIO (NIO) cited the blaze this past week as a reason the chip shortage would worsen in May.
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“Semi shortage comments are all [everywhere],” says Tim Fiore, chair of the Institute for Supply Management Purchasing Manager Index survey. The ISM PMI, a key indicator of manufacturing activity, shows that industry is recovering, but that orders are running ahead of production, in part, because of shortages. “Many times the chips are four or five tiers below the [auto makers]. It’s not going away in the short term. It will be a headwind until Q4.”
Parts companies that sell directly to auto makers are tier-one suppliers. Businesses that sell components to those parts companies are tier-two suppliers and so on. The size and breadth of the automotive supply chain makes tracking the problem more difficult for investors.
Automation technology provider Zebra Technologies (ticker ZBRA) doesn’t make cars, but a lot of its products have chips. “We certainly feel it.” says CEO Anders Gustafsson. “What might have helped us more than other industries, in the middle of the pandemic we did not to reduce our forecasts [with] our semiconductor partners and we increased our forecasts earlier than most.”
The auto industry, on the other hand, may have been too fast to cut orders for chips during the pandemic, and too slow to increase them as conditions improve.
Sales of cars are through the roof. U.S. sales of light vehicles came in at an annualized rate of 18.5 million in April, the highest level since 2005. The low reached during the depths of the virus crisis was about 8.6 million.
Ford Motor ‘s (F) retail sales, for instance, were 57% higher last month than in April 2020, when lockdowns, job losses, and widespread uncertainty slammed sales. But they were also 24% higher than in April 2019, before the pandemic. And Ford’s sales of electrified vehicles hit a monthly record at more than 11,000 units, up 262% year over year.
All that demand is great news, for Ford dealers. They buy cars from the company and sell them to the public. The company itself can’t fully benefit from the demand if it can’t produce as many cars as dealers can sell. When Ford reported its earnings on April 28, it estimated it would lose up to 50% of its planned second-quarter production, sending shares down more than 9% in response.
As NIO noted when it reported its earnings last week, a fire at a Renesas Electronics (6723. Japan) facility in Japan has made the situation worse. Renesas, essentially, makes microcontrollers and tiny computers. About 20% of the company’s cost of goods sold is spent at Taiwan Semiconductor Manufacturing (TSM), one of the largest semiconductor companies in the world. Sales to Toyota Motor (TM), Ford, and Volkswagen (VOW3. Germany) account for roughly 10% of total Renesas sales.
Renesas management indicated the fire could wipe out about 2% to 3% of total annual sales. But over one quarter, which is roughly how long the plant won’t be running, the impact is more like 10% of sales.
General Motors (GM) reports its first-quarter financial results Wednesday morning. Investors should listen for details on how management is addressing the shortage and how much production will be lost. The earnings themselves are expected to be good; only unexpectedly negative news is likely to move the stock.
Write to Al Root at allen.root@dowjones.com
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