Volkswagen is forced into production cutbacks, machinery makers are raking it in, and Ram. All that and more in The Morning Shift for August 20, 2021.
1st Gear: Toyota Is Far From Alone
The world’s biggest automaker (depending on how you count) said yesterday that it would be shutting down factories because of the global chip shortage and, Friday, formerly the world’s biggest automaker said it would slow production as well, according to Bloomberg. (If you’re still not sure what’s going on with regard to the chip shortage, read this.)
Volkswagen AG plants are set for a bumpy restart after the traditional summer break as the car industry remains in the grip of a chip shortage that most recently engulfed holdout Toyota Motor Corp.
VW’s Wolfsburg plant, the world’s biggest employing some 60,000 people, will restart with only one shift next week Monday through Friday, Europe’s biggest automaker said. Audi, the group’s biggest profit contributor, will extend the summer break by one week at its two factories in Germany as semiconductor supply remains “volatile and tense.”
Carmakers’ recent warnings of rocky months ahead are proving prescient after Covid-19 outbreaks in Southeast Asia forced restrictions at chip-processing plants. VW last month flagged “really constrained” output during the third quarter, while BMW AG predicted ongoing uncertainty.
If you’re curious why the chip shortage is likely to last for months more, I offer this Quartz story from May that describes the “bullwhip effect”:
Although a cowboy’s hand might only move a few inches, the ripple down the length of the whip grows larger until the tip of the whip snaps several feet through the air. This bullwhip effect explains how these small shifts in demand for certain goods ripple up the supply chain, causing bigger and bigger swings in production. Since they can’t predict the future, retailers introduce errors when they scale up their orders in response to expected demand. Wholesale suppliers magnify that error when they adjust their own orders to manufacturers’. Even more error is introduced when manufacturers order raw materials from their suppliers, and so on. The further up the supply chain, the more demand signals become distorted.
That’s what happened to the supply chain for semiconductors last year. Manufacturers of phones, automobiles, and consumer electronics, eager to ramp up production, rushed orders in for more semiconductors. That created a sudden surge of demand for suppliers like Huawei, Qualcomm, and NVIDIA, which design and sell the chips found in everything from Nissans to iPhones. These companies then put in their own wave of extra orders with suppliers: manufacturers like TSMC, Samsung, and Intel that run foundries with the capacity to assemble advanced semiconductors. That created an even more overwhelming crush of orders for the companies that supply the foundries with basic parts.
Soon industries with no connection to electronics were facing shortages as chip foundries fielded far more orders than any supplier could fulfill. Backlogs began to pile up. Today, wait times for new chip orders stretch to the end of 2021.
[…]
“What happens is, supply gets tight, prices go up, and then everybody says, ‘Oh, let’s build another factory.’ But another factory takes two years to build,” said [Harvard Business School professor Willy Shih]. In that time, demand might fall and the immediate shortage might ease. “Just when the new factories come online, there’s all this excess supply and then prices collapse and no one wants to build another factory for a while.”
2nd Gear: The Factory Machinery Makers Are Doing Well
Reuters reports that if you are in the factory machinery business at the moment, then you are in good shape, thanks to EVs. And it is all just the beginning.
New electric vehicle factories, funded by investors who have snapped up newly public shares in companies such as EV start-up Lucid Group Inc (LCID.O) are boosting demand. “I’m not sure it’s reached its climax yet. There’s still more to go,” Andrew Lloyd, electromobility segment leader at Stellantis-owned (STLA.MI) supplier Comau, said in an interview. “Over the next 18 to 24 months, there’s going to be a significant demand coming our way.”
Growth in the EV sector, propelled by the success of Tesla Inc (TSLA.O), comes on top of the normal work manufacturing equipment makers do to support production of gasoline-powered vehicles.
Automakers will invest over $37 billion in North American plants from 2019 to 2025, with 15 of 17 new plants in the United States, according to LMC Automotive. Over 77% of that spending will be directed at SUV or EV projects.
Equipment providers are in no rush to add to their nearly full capacity.
“There’s a natural point where we will say ‘No’” to new business, said Comau’s Lloyd. For just one area of a factory, like a paint shop or a body shop, an automaker can easily spend $200 million to $300 million, industry officials said.
“This industry is the Wild, Wild West right now,” John Kacsur, vice president of the automotive and tire segment for Rockwell Automation(ROK.N), told Reuters. “There is a mad race to get these new EV variants to market.” Automakers have signed agreements for suppliers to build equipment for 37 EVs between this year and 2023 in North America, according to industry consultant Laurie Harbour. That excludes all the work being done for gasoline-powered vehicles.
If you are in a business that is in a position to potentially say no to new business then you are in a very good business indeed.
3rd Gear: A Toyota Supplier Says NBD
Again, Toyota said yesterday that there would be drastic factory shutdowns because of the chip shortage, and its biggest supplier, Denso, said Friday that, yeah, it had seen this coming. Via Bloomberg:
Denso will likely take a profit hit of about 20 billion yen ($182 million) to 30 billion yen in September due to Toyota’s production cuts, Chief Financial Officer Yasushi Matsui said. But that loss is more than covered by the 75 billion yen in potential losses Denso had earlier worked into forecasts for the fiscal year ending March, he said.
“There are automakers that can’t up their production after stumbling, but if Toyota says it will recover, it really will,” Matsui said in an interview at the company’s headquarters south of Tokyo on Friday.
For Denso, which issued a relatively conservative profit outlook for the current fiscal year of 440 billion yen last month, “it’s likely we’ll exceed this,” Matsui said.
This didn’t help Denso’s stock price.
Stock in Denso decreased 4.3% on Thursday and tumbled another as much as 9.7% on Friday, its biggest intraday drop since March last year, before erasing some of those losses to close down 8.8%.
Toyota fell again on Friday, although by a smaller amount to close 4.1% lower, and at least one analyst expressed confidence the world’s No. 1 carmaker, renowned for its generally good supply-chain management, can weather the upset.
“Toyota seems to be expecting things to get back to normal in October” even though there’s a possibility the disruption won’t end in September, Koji Endo, an analyst at SBI Securities Co., said.
4th Gear: GM Workers In Mexico Vote To Get Rid Of Their Contract
This is almost 6,000 workers in Silao, Mexico, about four hours northwest of Mexico City. A majority of the workers there say that their contract is bad and their union isn’t helping things. From Reuters:
An initial vote in April was suspended after Mexico’s labor ministry found irregularities in the process, prompting the United States to lodge the first complaint under the labor enforcement mechanism of the United States-Mexico-Canada Agreement (USMCA), which took effect last year.
The unionized workers will keep the same terms for pay and benefits as they seek new representation or create a union from scratch. Choosing a new union will require another vote, in which the current union could also vie to take back the contract.
Of 5,876 GM employees who cast ballots in the Tuesday-Wednesday vote at the plant in the city of Silao, 3,214 workers rejected the bargaining agreement while 2,623 workers voted to keep it, the labor ministry said.
Many workers who campaigned for the “no” vote said their current union did not fight hard enough for better salaries at the plant that produces thousands of profitable pickup trucks a year.
“It’s a huge peace of mind knowing we’re no longer tied to this union,” said G.D., a plant employee for more than 25 years who said he reached the top salary level for his position years ago, and who asked not to disclose his name for fear of reprisals.
As someone in a union that is currently in the midst of some strife, I can sympathize. The questions to ask yourself in these situations are: Who benefits from the status quo and why? And how can we help the most?
5th Gear: Ram Recall
Around 212,000 Rams are now under recall because the side airbag might break and send gas and parts into the cabin because of moisture. The affected vehicles are some 2015-2020 Ram 1500 Classics, some 2015-2016 Ram 2500s and 3500s, and some 2016 Ram 3500 Cab Chassis. Ram will notify owners and replace the airbags, according to a document filed with the National Highway Traffic Safety Administration. The timeline of events, according to the document:
• On December 9, 2020 FCA US, LLC (“FCA US”) Vehicle Safety and Regulatory Compliance (“VSRC”) opened an investigation after discovering that some SABIC’s with moisture contaminated inflators may have been built into vehicles.
• From December 9, 2020 to July 8, 2021 multiple discussions took place between FCA US VSRC and the supplier. It was found that moisture introduced into the inflator during supplier manufacturing may cause internal corrosion over time and potentially leading to Stress Corrosion Cracking (“SCC”) in the inflator. FCA US was informed by the supplier that its SABICs were built on a line that was not affected by the moisture contamination issue. FCA US VSRC acquired 33 SABIC’s from FCA US vehicles built with SABIC’s from the inflator suspect period and were sent to the supplier for analysis. No evidence was found of SCC during the analysis.
• On July 8, 2021, FCA US VSRC was notified of a SABIC inflator rupture on a 2015 Ram 1500 vehicle. The inflator was manufactured within the suspect time period and on the suspect lines that allowed moisture contamination.
• As of August 5, 2021, FCA US has identified one customer assistance record, zero warranty claims, and zero field reports potentially relating to this issue for all markets.
• As of August 5, 2021, FCA US is not aware of any accidents or injuries potentially relating to this issue for all markets.
• On August 05, 2021, FCA US determined, through the Vehicle Regulations Committee, to conduct a voluntary safety recall of the affected vehicles.
Reverse: To Mars
Neutral: How Are You?
I flew to Detroit and back this week to see the new(ish) Volkswagen Jetta, which I will have more to say about next week. I was in a part of the Detroit metropolitan area I have never been to: the ritzy northern suburbs of Birmingham and Farmington Hills. They seem like the headquarters for ladies who lunch.
I walked down Woodward Avenue at some point, and found old guy after old guy sitting on a lawn chair and simply watching traffic. Like, that was their whole evening. I am told this is a thing the week before the Woodward Dream Cruise, which is tomorrow. I would mock this except every year New York has a Thanksgiving parade, for which a bunch of people line the streets, to see some giant balloons or something.
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