Thinking Citizen Blog — Chip Famine Leads Ford and GM to Cut Auto Production — So What?
Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day
Today’s topic: Chip famine leads Ford and GM to cut auto production — so what?
Today, cars guzzle chips as well as fuel. They are needed for engines, transmissions, brakes, and just about every other sub-system. A chip shortage has recently led Ford to cut production of its most profitable and best-selling vehicle — the F150 pick up truck. This could cut Ford profits by $1.5–2.5 billion. So what? Is this just a blip in a normal feast-or-famine cycle? Or is it a wake-up call for America? Is it time for Biden to take steps to revitalize domestic manufacturing of semiconductor chips? What is the cause of this shortage? Is it just about multiple forecasting errors? What else is going on? Experts — please chime in. Correct, elaborate, elucidate.
HIGHER THAN EXPECTED DEMAND — PCs, smart phones, cars
1. “In the early days of the global pandemic, we saw unprecedented demand for PCs, cameras, keyboards and displays. People who had PCs realized they needed better versions, and multi-person households could no longer share devices. This growing demand led to over 10% growth in the PC space for 2020, and surging demand in the fourth quarter reached 25.4%.”
2. Then came surprising demand for smart phones: “With the rising demand for PCs early on in the pandemic came a narrative of stifled demand for smartphones. With all of us locked down at home, we were supposed to see material decreases in mobile devices’ demand. While forecasters were right in the early onset of the pandemic, it was business as usual for the smartphone industry by the third quarter. By the fourth quarter, demand had surged to nearly pre-pandemic levels, down by only 2%, according to Canalys data. The 5G cycle, including the introduction of Apple’s 5G variant, further spurred demand.”
3. “The second big forecasting miss came in the automotive industry. Shutdowns due to Covid-19 in factories, coupled with expected economic strains, led automakers to cut forecasts for production and vehicle demand. And while the estimates for decreased automotive sales look to be around 15% year over year for 2020, much like the smartphone space, the demand for new vehicles has
surged into the close of 2020, leaving many automakers…short of chips.”
SUPPLY CONSTRAINTS FROM CHINA TO TEXAS
1. The first supply side hit was when Covid hit China.
2. The most recent hits have been the winter storms ravaging Texas.
3. “Industry analysts say the shortages are partly because of a pre-pandemic trend toward consolidation and inventory depletion in the chip sector, which was exacerbated by the kind of coronavirus-related disruptions that have led to shortages of other products, such as exercise bikes, tablets and toys.”
US SHARE OF GLOBAL CHIP PRODUCTION IS DOWN SHARPLY SINCE 1990
1. US share of global chip production capacity has fallen from 37% in 1990 to 12% today.
2. One factor: the outsourcing by US companies.
3. Another: subsidies by governments of South Korea, China, Singapore.
NB: “The Semiconductor Industry Association, the U.S. Chamber of Commerce and other business groups sent a letter on Thursday to the Biden administration urging it to work with Congress to provide funding for semiconductor manufacturing and research and to establish an investment tax credit for new manufacturing facilities.”
Opinion: This is how the great chip shortage happened — and how it gets solved
Global Chip Shortage Challenges Biden’s Hope for Manufacturing Revival
https://en.wikipedia.org/wiki/Chip_famine
Ford Expected to Slash Vehicle Production Over Chip Shortage
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