Automotive Chip-Shortage Cost Estimate Surges to $110 Billion
(Bloomberg) -- As the semiconductor shortage hobbling the global automotive industry has worsened, its cost as a hit to sales has almost doubled to $110 billion, up from an earlier estimate of $61 billion.
That’s the latest assessment of AlixPartners, a global consulting firm closely monitoring the widening crisis. It also now says the world’s carmakers will lose 3.9 million vehicles of production to the chip shortage this year, more than its prediction four months ago of 2.2 million. That’s about 4.6% of the 84.6 million vehicles that AlixPartners had projected in total production for 2021.
Automakers issued warnings in earnings reports in recent weeks that the chip shortage would get worse before it gets better. Ford Motor Co. and General Motors Co. each predicted the second quarter would be the worst of the calamity, as they are forced to idle factories for lack of the essential components. But the industry isn’t likely to see signs of recovery until the end of the year, according to the AlixPartners assessment.
“It’s still deeply impacting the third quarter,” Mark Wakefield, head of the firm’s global automotive practice, said in an interview. “We don’t really have it getting into a recovery mode at all until the fourth quarter.”
The timing takes on added importance because the chip-related production cuts are driving up prices of new and used vehicles, contributing to higher inflation in the U.S. Another researcher, LMC Automotive, predicts global production will be cut by almost 3 million vehicles in the year’s first half alone.
Ford Chief Executive Officer Jim Farley said Thursday the company is redesigning its vehicles to use the most common and “accessible” chips. It also is planning to boost semiconductor inventory and sign contracts directly with chipmakers, rather than go through an auto supplier.
“We really see the second half improving,” Farley said at Ford’s annual shareholders meeting. “We’re starting to get more confidence in the chip supply.”
“There are up to 1,400 chips in a typical vehicle today, and that number is only going to increase,” said Dan Hearsch, managing director of AlixPartners’ automotive practice. “The top priority for companies right now is mitigating the best they can the short-term effects of this disruption, which may include everything from renegotiating contracts to managing the expectations of lenders and investors.”
AlixPartners, which helped guide GM through bankruptcy more than a decade ago, estimated in January that the chip shortage would cost the auto industry $61 billion in lost revenue. As the crisis has worsened, the firm has begun working with automakers to overhaul supply-chain management to try to avoid this happening again.
The first lesson automakers are learning, Wakefield said, is they are no longer “the 800-pound gorilla” in supplier relations, especially with chipmakers who also serve tech giants that pay higher prices for more advanced semiconductors for mobile phones, laptops and video games. Suppliers like that can’t be strong-armed into dancing to Detroit’s tune.
Automakers are now in a situation “where they’re eye-to-eye and not the big dog on the street,” Wakefield said. “Reducing costs has been a priority at automakers. It’s great to save money, but not if you can’t build cars.”
©2021 Bloomberg L.P.