Carmakers Don't Deserve Special Chip Treatment
(Bloomberg Opinion) -- When does a car deserve special treatment from the government? That’s the question at the heart of this week’s White House summit on the semiconductor shortage that’s impacted everything from smartphones to tractors, factory equipment and, yes, passenger vehicles.
The confab is unlikely to yield any immediate solutions. The Biden administration’s infrastructure spending proposal includes $50 billion to incentivize domestic chip manufacturing and research, but all the money in the world can’t produce semiconductors out of thin air overnight. There is no easy fix for the mismatch in chip supply and demand as the economy bounces back from the doldrums of the pandemic and products of all shapes and sizes become more high-tech. Rather, this is largely an opportunity for political maneuvering and an airing of grievances.
U.S. automakers want chips for cars to be prioritized in any government funding that’s thrown at the problem. This is about more than just fuzzy statements of good will; the Alliance for Automotive Innovation called for the government to specify a “particular percentage” of semiconductor investment for carmakers that’s “reasonably based” on projected future needs, as reported by Reuters. But technology sector trade groups say playing favorites would be market interference. Semiconductor companies don’t want strings attached to factories that can cost billions of dollars to set up and rely on a steady churn of products from a variety of industries.
The sheer scale of the crunch makes automakers’ argument for special dispensation puzzling. Carmakers aren’t the only ones suffering; they are simply the ones complaining the loudest. The logjams have caused supply-chain disruptions and production warnings across the entire economy from consumer electronics and medical devices to computer hardware and graphics chips. The list of affected companies is long, ranging from Apple Inc. to Nvidia Corp. and Caterpillar Inc. Why should automakers get to jump the queue over these other customers?
Cars are not a matter of national security; no one knows that better than auto executives themselves. After all, several large automotive trade groups made that argument repeatedly over the course of 2018 and 2019 when the Trump administration was threatening to slap foreign cars with a 25% tariff. The idea that the government should intervene in the car-making business but only at the industry’s convenience is not a particularly strong one. In 2019, the White House reportedly sought to take advantage of the transition period for the renegotiated U.S.-Mexico-Canada free trade agreement to unilaterally dictate how and where global auto companies make their cars. The risk was that the government could abuse the opaque process of signing off on companies’ preparation for the new rules to favor one automaker over another or pressure executives into making politically expedient investments, Bloomberg News reported at the time. That went over about as well as you might expect and yet the conditions on semiconductor capacity that the industry is now proposing aren’t all that different in principle.
The next obvious question is whether the automakers can actually make a reasonable projection of their future needs. The industry’s own inventory management foul-ups are at least partly to blame for carmakers’ current semiconductor headaches. During the pandemic, companies took an overly pessimistic view of future vehicle purchases and curbed orders with their suppliers, who then cut back on chip shipments. With demand booming in the home-gadget sector, chipmakers had little room to pivot when the auto industry realized people in fact wanted more cars. This miscalculation is somewhat understandable; it was an unprecedented global pandemic. But an explosion in the sheer number of semiconductors now required to make even the most basic car models means automakers should have planned on a higher baseline level of demand regardless of how many people were on the roads, as Bloomberg Opinion’s Anjani Trivedi has written.
Will this be the last time the auto industry misjudges how many chips it needs? The semiconductor industry can’t run that risk. Chip manufacturing is an extremely expensive business; Intel Corp. chief executive officer Pat Gelsinger told CBS News each new factory costs $10 billion. To justify that investment and maintain profitability levels, companies have to run their factories as much as possible. It’s untenable to reserve a certain amount of capacity for an industry that may or may not wind up needing it. And it’s hard to imagine the automotive industry being willing to commit to a certain level of chip ordering years into the future, particularly because the nature of its needs will evolve as carmakers progress in the development of battery-powered and self-driving models.
For all of some automakers’ clamor over the issue, it’s not clear that this is an actual crisis. It seems more like an unwelcome — but ultimately temporary — phenomenon that the better operators in the industry have been able to overcome. While Ford Motor Co. warned that the chip shortage would curtail production by 1.1 million vehicles this year and leave it with a $2.5 billion hole in its expected earnings this year, General Motors Co. said it had found ways to mitigate the supply-chain issues and was on track to hit the high end of its profit guidance. Toyota Motor Corp. was proactive about building stockpiles of inventory and has faced comparatively minimal disruptions to its production plans as a result. Most automakers expect the supply-demand mismatch in their industry to work itself out by the beginning of 2022.
Fixing a temporary problem with a permanent solution that leaves other sectors and the chipmakers themselves at a disadvantage would be misguided.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.
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