If chip production is recovering, why are automakers still making fewer cars?

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Automakers cut 76,000 vehicles from global production plans in mid-September, according to analysts at AutoForecast Solutions. The company says they will produce about 3.23 million less than planned this year.

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Analysts have long predicted that the global microchip shortage in the auto industry will subside by the end of 2022. New production cuts puncture that hope.

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How did we get here, and how long will it last?

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In 2019, before the first signs of COVID-19, Americans bought more than 17 million cars. This was the fifth year in a row that we did this.

By the end of 2022, Kelley Blue Book parent company Cox Automotive projects that Americans will have bought as much as 13.3 million.

The drop comes despite a huge demand for new cars, as prices hit record highs this summer. The average new vehicle sold in August was $48,301–10.8% more than a year earlier.

Problem? Global shortage of microchips.

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how did we get here

A generation ago, only the most expensive cars had microchips. Today, even an extremely affordable, low-tech car like the Mitsubishi Mirage—which has a starting price of just $14,645—contains dozens of tiny microprocessors. They control everything from the traction control system to the cabin temperature.

High-end luxury cars like the Mercedes-Benz EQS, which has a programmable fragrance and hands-free highway driving system, can contain hundreds.

A perfect storm of events has left the auto industry with a limited supply of those critical chips.

In the early days of the COVID-19 pandemic, as governments around the world imposed travel restrictions to limit the spread of the virus, demand for new cars fell. Automakers limited their orders for microchips anticipating months of slowing vehicle production.

But chip factories didn’t slow down like car factories. Consumers ordered new electronics for the convenience of working from home and going to school.

When vaccines allowed people to travel again, the demand for new cars increased. Automakers tried to increase their orders for new chips. But chip factories were already operating at capacity. They still haven’t caught.

To complicate matters, Americans’ thirst for new electronic features in their cars is only growing. In August, 17.5% of new cars sold were luxury vehicles – an almost record.

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improve chip production

Global microchip production is beginning to recover.

Susquehanna Financial Group reports that, in August, chipmakers were fulfilling orders an average of one day faster than in July.

Other industries that use the chips are slowing their sales. Susquehanna analyst Chris Rowland reports that demand for new cellphones has slowed, easing pressure on chip supply.

Dell Technologies Dell,
Chief Financial Officer Tom Sweet recently told Bloomberg that the supply chain for personal computers is “acting more like a historical norm” in September.

Investors feel that the chip market is slowing down. At press time for this article, the Philadelphia Stock Market Semiconductor Index (SOX,
was down more than 36% year-on-year.

But it’s the wrong kind of chips

If chip production is improving, why are automakers still cutting their production numbers?

Because the high-end chips used in computers and cell phones are not the chips that automakers need.

The automotive industry’s modular design approach—the power window switches in an automaker’s most expensive vehicle are often the same as those found in its least expensive—means that today’s cars are loaded with older, less-powerful microchips that Doing simple work.

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Automakers go through a rigorous qualification process to certify chips for use. They can’t easily swap in a more complex chip for an older chip that’s already been through security testing.

“We are going to have a lot of semiconductor capacity in the second half of 2022 – we are nearing the end of the supply crunch,” said Sandeep Deshpande, head of European technology research for JPMorgan JPM.
“However, the capacity still needs to be qualified for use in the automotive industry. … If this was not the issue, I believe things could return to normal by the end of the year.”

Spooling up chip production is a slow process

Chip makers will only switch foundries from producing high-end computer-bound chips to manufacturing cheaper devices used in cars when it is the most profitable decision. So change comes slowly.

Once it arrives, it takes time to fulfill orders. Mohit Sharma, a procurement and supply chain specialist based in India who advises Fortune 500 companies, told Financial Management magazine, ,A typical semiconductor production line may involve 700 manufacturing steps in 14 weeks.”

Chip makers are working to increase production capacity. But starting new factories is a long process.

intel intc,
Last January announced plans for two new microprocessor factories in Ohio. They will produce their first usable chips sometime in 2026.

Domestic production may be part of the answer. According to a September 2020 report by the Semiconductor Industry Association, the US produced 37% of the world’s chip supply in 1990. Today, just 12% of the global supply is made domestically.

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More chips don’t necessarily mean more cars

For decades, auto industry practice meant keeping a stockpile of new cars available for sale. Dealers regularly kept so much inventory on hand that they discounted most cars to sell them.

Even once chip production is fixed, that practice may not return.

GM, “We’ll never go back to the level of inventory we held pre-pandemic because we’ve learned we can be a lot more efficient,” GM GM,
CEO Mary Barra told reporters last year.

bmw bmw,
Chief Financial Officer Nicholas Peter last told the Financial Times that the automaker plans to “clearly stick with … the way we manage supply to keep our pricing power at current levels.”

Daimler AG, parent of Mercedes-Benz, has the same view. “We will intentionally reduce the level of demand,” Daimler CFO Harald Wilhelm told the FT.

Ford F,
CEO Jim Farley has suggested that the company may move closer to a build-to-order business model, although he recently promised dealerships that Ford would not sell cars directly to customers like the Tesla TSLA,

Dealer groups also say that large inventories and huge discounts may not make a comeback.

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Automakers are financially interested in making as many cars as Americans will buy. But the lack of a chip must be teaching them not to make more than that.

this story originally ran KBB.com,

Credit: www.marketwatch.com /

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