Both Ford and General Motors (GM) have announced they will produce fewer cars and trucks because of a severe shortage of the computer chips that go into them.
Ford is cutting production by as much as 20 percent in the first quarter, and GM is extending shutdowns at three auto assembly plants. The result will be fewer vehicles produced in the first half of the year, with the shortage also affecting other industries.
What’s behind the shortage of semiconductors? In short, you can blame the rapid economic recovery during the coronavirus (COVID-19) pandemic. When the pandemic began in late March and early April, semiconductor makers slammed on the brakes, assuming demand would fall off a cliff. Initially, it did.
Early recovery
But no one could foresee the auto industry recovering so quickly as consumers adapted to online car shopping and purchases. Auto plants reopened after a few weeks but quickly ran out of computer chips that power everything from infotainment systems to power management.
Getting resupplied was not an easy task. Industry experts say making a computer chip is a complicated process that takes time. The lead time in turning out chips can be as long as 26 weeks.
It may be affecting the auto industry more than other consumer products because the car companies have found themselves in the back of the line. The pandemic created new demand for computers and cell phones, and the companies that make them never canceled their orders -- they increased them.
Working at home is chip-intensive
People working from home and students attending online classes needed electronic equipment, and that industry sucked up any excess supply of chips. People stuck at home also played a lot more video games, and those consoles use a fair number of semiconductors.
Despite the reduction of output in the auto industry, the analysts at Cox Automotive predict that neither dealers nor consumers should see any short-term disruption. That said, nearly every automaker around the world has been forced to trim at least some of its production.
Should that eventually result in a reduction of new vehicle inventory, it could cause dealers to hold back on incentives and stay closer to the sticker price when negotiating with buyers. Any shortage of new vehicles could cause used car prices to rise.
It all depends on how long it will take computer chip manufacturers to catch up with demand. Phil Amsrud, an analyst at IHS Markit, tells The Wall Street Journal that might not happen until the third quarter of 2021, or even later.