A global semiconductor (microchip) shortage is disrupting automotive production and may delay a recovery of new vehicle sales and profitability in the sector, Fitch Ratings says. Car-makers are reducing output and selectively idling plants until the shortage eases, which we expect to take several months. Some automakers and suppliers may reconsider their supply chains, opting for greater vertical integration and localisation, which could require additional investments.
Increased demand for consumer electronics during lockdowns has led to the global microchip shortage, first reported in December 2020. The situation is particularly acute for automotive companies, which are experiencing a strong increase in electric vehicle demand, while chip-makers often reserve supply for larger technology companies.
The shortage is disrupting automotive production in most regions, leading to sporadic slowdowns and selective plant shutdowns, although the overall scale and magnitude of the problem is not yet known. We expect disruptions to continue for several months and to dissipate in 2H21.
The shortage could delay the automotive sector’s recovery from the pandemic-related drop in demand, although we expect most of the lost production to be recouped in 2H21. Global lost vehicle production could reach about 1 million units in 1Q21, according to Wards Intelligence and LMC Automotive.
However, car-makers are prioritising available chips for their most profitable and best-selling models, where possible, reducing pressure on earnings. Given the expected short-term nature of production disruptions, we do not expect the ratings in the sector to be affected unless the microchip shortage lasts well beyond a few months.
Some car-makers and auto suppliers may reevaluate their supply chains as a result of this shortage, opting for greater vertical integration in electronics and diversifying their pool of suppliers with higher production localisation rates. This may require additional capex and R&D costs, which could weigh on cash flow generation.
Chinese local brands may be less affected than many global brands as they were more optimistic about the local market recovery and placed larger chip orders. They also typically keep higher inventories of auto parts that could support longer production periods. Sino-Japanese JVs were not affected in December, but the SAIC-VW JV and the FAW-VW JV reported double-digit percentage drops in production volume in December due to the chip shortage and low demand for flagship models.
Car-makers in Japan and India are experiencing production disruptions, with expected production shortfalls in the low single-digit percentage range. However, many producers have built up finished products inventory, which will help to cushion pressures on sales and profitability. Honda is seeking production cuts in China, while Toyota has been able to return to normal production in the country after initial alignments in mid-January.
Toyota’s diversified supplier base and higher component inventories also help mitigate pressures. South Korea’s Hyundai and Kia avoided material chip shortages as they maintained larger orders.
The decision by European car-makers and suppliers to reduce chip orders due to their cautious expectations of a vehicle demand recovery contributed to the region’s supply shortage. The Volkswagen group is the most affected manufacturer by the shortage in Europe. Daimler has also announced that it will cut production of Mercedes cars in a few plants in Germany and Hungary.
Car-makers could lose about 230,000 units of production in North America in 1Q21, which roughly equates to a 5% shortfall in production, according to preliminary assessments. Ford has had a few production slowdowns and temporary shutdowns as a result of the microchip issue. General Motors has not announced any such issues yet, but some vehicle options may not be currently available.
