‘Super Crazy Supply Chain Shortages’

    How The Auto Industry Is Combating The Global Chip Shortage

    The Tesla Cybertruck is the company’s first EV truck offering. (Image Courtesy Of Tesla)

    Few businesses are feeling the effects of the global chip shortage worse than automakers. Whether you love it or hate it, Tesla has been one of the few companies in the space that continues to deliver record vehicle volumes.

    Despite posting a quarterly profit of more than US$1 billion in Q2 2021, which is more than any full year of profit in company history, Tesla still faced its fair share of supply chain issues.

    In an early September tweet, Elon Musk said that “2021 has been the year of super crazy supply chain shortages, so it wouldn’t matter if we had 17 new products, as none would ship. Assuming 2022 is not mega drama, new Roadster should ship in 2023.”

    The Rise Of The Model 3

    The Tesla Roadster is one of the company’s most highly anticipated vehicles, along with the Tesla Cybertruck and its electric semi-truck. All three vehicles have yet to reach mass production.

    Tesla produced and delivered more than 200,000 vehicles in the Q2, a record high. Of all vehicles produced, 99% were the Tesla Model 3 sedan and the Model Y, the company’s mid-size SUV. Just a few years ago, the company depended on sales of its Model S, a more expensive luxury sedan, and the Model X, a luxury SUV. Today, it’s targeting a wider audience with its Model 3 which starts at under US$40,000.

    99% of vehicles produced in Tesla’s Q2 2021 were the Tesla Model 3 sedan and the Model Y, the company’s mid-size SUV (pictured here). (Image Courtesy Of Tesla)

    Growth In The Chinese Market

    The company now produces both the Model 3 and the Model Y out of its factory in Fremont, California, and its Shanghai plant. China has been a huge market for Tesla, as the company sold more than 44,000 vehicles produced in China in August 2021 alone.

    The new Shanghai factory was built in nine months but took longer than expected to reach its now high-volume production. “When you put a factory in a new geography, in order for that factory to be efficient, you have to localize the supply chain,” said Musk. “So there’s no such thing as cut and paste. It does not exist. And it would obviously be insane to do vehicle production in Europe and send vast numbers of parts from North America. That would make the producing in Europe, for example, just crazy. You got to look like the supply chains have efficiency and then you’re moving as fast as your least lucky, least good supplier. Some of these supply chains go three or four layers deep. Frankly, I feel at times that we are inheriting all force majeure of Earth. If anything goes wrong anywhere on Earth, something happens to mess up the supply chain.”

    Supply Chain Pivots

    Despite record financials and production numbers, the company has adjusted its operations to combat supply chain challenges, including swapping out chips and rewriting software. The pivots have helped Tesla maintain its existing operations, but if supply chain issues persist it could further delay the release of new models.

    “Regarding supply chain, while we’re making cars at full speed, the global chip shortage situation remains quite serious,” said Musk. “For the rest of this year, our growth rates will be determined by the wide range of chips that are at various times the slowest parts in the supply chain. It’s worth noting that if we had everything else, if we had the best numbers of vehicles themselves, we would not be able to make them. Everything except the chips, we won’t be able to make them. The chip supply is fundamentally the governing factor on our output. It is difficult for us to say how long this will last because this is out of our control essentially. It does seem like it’s getting better, but it’s hard to predict. So, in fact, even achieving the output that we did achieve was only due to an immense effort from people within Tesla. We were able to substitute alternative chips and then write the firmware in a matter of weeks.”

    What Needs To Happen To Produce New Models

    Tesla was upfront about how difficult it is to give accurate timelines when so much of its supply chain is outside of its control. “In order for Cybertruck and Semi to scale to volume that’s meaningful for customer deliveries, we’ve got to solve the chip shortage working with our suppliers,” said Musk.

    The Tesla Semi-truck will likely reach mass production after the Cybertruck and Roadster. (Image Courtesy Of Tesla)

    In regard to building its own chip factory, Musk said that it could take 12 to 18 months, which would be impractical if the chip shortage improved by the end of that timeline. “The Cybertruck and Semi both are heavy users of cell capacity,” said Musk. “We’ve got to make sure we have the cell capacity for those two vehicles, or it’s kind of pointless. We can make a small number of vehicles, but the effect of cost if you make a small number of vehicles is insane, like they would literally cost US$1 million apiece or more. There’s a reason why you do things in volume production, which is to get the economies to scale and get the cost down. We are looking at a pretty massive increase in cell availability next year. But it’s not like [it’s going to be on] January 1. It comes through — it ramps up through the course of next year. But even without Tesla cell production, with our suppliers, we’ll be able to deliver about twice as much cell output in next year as this year.”

    In sum, scaling new models will take time, but more certainty is likely to materialize as supply chain shortages get sorted out.

    What Other Automakers Are Saying

    Tesla has been one of the few automakers that has bolstered production during the chip meltdown. Detroit has been hit particularly hard by the crisis. Ford, for example, lost around 50% of its planned production in Q2 2021. In early September, the company released a statement saying it was applying a further cut to F-150 production, as well as two other vehicles, as a direct response to the chip shortage.

    Ford’s comments on the shortage illustrate just how blindsided many automakers have been. Although Ford CFO, John Lawler, said in the company’s Q2 2021 earnings call that its suppliers have assured them they are rerouting toward the automotive industry, Ford still “sees the chip issue running through this year, and we could see it bleeding into the first part of next year. But I think we won’t really have a good feel for that until later in this year,” said Lawler.

    General Motors sold 3.5 million vehicles in the six months ending on June 30, 2021, up 20% from the same period last year but down 8% from the first six months of 2019. The company also raised its full-year earnings before interest and taxes (EBIT) guidance to a range of US$11.5 billion to US$13.5 billion. “We are being cautious because of the uncertainty due to the Delta variant and its potential impact on the supply chain,” said GM CEO Mary Barra. “But we do believe that the combination of our safety protocols and the rising vaccination rates will help minimize disruptions, but we do have to note the situation does remain fluid. We are also putting long-term solutions in place to de-risk our supply chain. This includes collaborating with semiconductor manufacturers and continuing to enhance transparency throughout the entire semiconductor supply chain.”

    Every major automaker has been blindsided by the chip shortage, which is making existing operations and any plans for new vehicle rollouts extremely challenging. Toyota estimates it will build just 540,000 vehicles in September compared to an earlier forecast of 900,000 vehicles. The updated estimate includes a decrease of up to 170,000 units produced in North America in August and September.

    Similar to Toyota, Honda is notching strong quarters from a financial perspective, but is cutting production and shutting down factories for the rest of the year. European automakers are also suspending production at entire plants, or operating plants with fewer shifts. Estimates vary, but most automakers do not expect the chip shortage to noticeably improve until 2022, or even the second half of 2022.

    An Appreciating Asset?

    Coming out of the COVID-19 lockdown, many buyers with excess discretionary income are looking to spend. But similar to the housing market, supply chain constrains means there isn’t enough new production to satisfy demand. Just as the prices for existing home sales have skyrocketed throughout the United States, so too have the prices for used cars. The old maxim of a car losing 15% to 20% of its value once it’s driven off the lot simply hasn’t applied in 2021. In fact, the reverse is true.

    Dealers desperate for inventory have bought back used cars for more than they sold them for just a year or two ago. Outside of regular consumers, the same rental car companies that were forced to liquidate inventories during the height of the COVID-19 pandemic are now scrambling to restore their fleets to capitalize on demand. We are living in one of the most topsy-turvy marketplaces, contradicting traditional economic principles left and right.

    The Silver Lining

    The silver lining to the global chip shortage is that it could end up helping automakers transitioning to electric vehicles (EVs). Many have implemented permanent changes to their supply chains. The general theme is automakers are now trying to get away from a world of hyper efficiency and shifting back to a strategy that accounts for more error. In an effort to reduce costs and streamline profits, it has been commonplace to try and reduce parts and components inventory as much as possible so that companies only buy what they need. The downside is that there are fewer reserve parts (or chips) in case something goes wrong (like a global pandemic).

    Going forward, it wouldn’t be surprising to see delays in the rollout of highly anticipated EVs like the Ford Lightning or Toyota’s new electric SUV, the bZ4X, as automakers already have their hands full simply executing on their existing operations. But with a supply chain that better accounts for uncertainties, these same automakers could exit the chip shortage better positioned to successfully rollout EVs for decades to come.

    The pre-production model with available features of the 2022 Ford F-150 Lightning Platinum, Lariat, and XLT. (Image Courtesy Of Ford Motor Company)

    Similar to the housing market, you’ve probably heard that there’s never been a better time to sell your used car. But with such a sparse set of options left on the lot to buy, this benefit is much harder to take advantage of in practice.