This week, automobile manufacturers reported their sales numbers for the second quarter of 2021. Investors have been looking forward to the key insights these numbers provide going into the second half of the year as electric vehicle investment ramps up and chip shortages threaten to cause sales to plummet.
The numbers show that for the second quarter and year-to-date periods, automakers continued seeing higher sales on strong demand. However, inventories have continued to dwindle over this timeframe as more factories have been forced to slow down production, and the lack of supply is beginning to seriously impact sales. General Motors Co. (GM, Financial), Ford Motor Co. (F, Financial) and Tesla Inc. (TSLA, Financial) all fell short of delivery expectations for the second quarter, with Ford reporting a sudden drop-off in June.
Unless the chip shortage is resolved soon and production picks back up, the impact of inventory constraints on sales will only get worse. This could impact the high-flying stock prices of automakers that have benefitted from sales increases and EV optimism in recent months.
General Motors
General Motors (GM, Financial) reported sales on Thursday, with second-quarter sales rising 39.7% to 688,236 vehicles year over year but missing analysts estimates, which had called for anywhere between 40% and 43% growth.
“Consumer demand for vehicles is also strong, but constrained by very tight inventories. We expect continued high demand in the second half of this year and into 2022,” Elaine Buckberg, General Motors’ chief economist, said.
The company ended the quarter with only 211,974 vehicles in its inventory, down 37% compared to the first quarter. It has temporarily idled several North American plants and halted production entirely at facilities in South Korea and Brazil.
Despite inventory struggles, General Motors did experience a benefit from increased operational efficiency due to how quickly vehicles were being sold once they hit dealer lots. The turn rates at many dealer lots are around 12 days, roughly a tenth of what they were in years past, resulting in cost efficiencies and reduced waste.
Ford
Ford (F, Financial) seems to be experiencing more of a headwind from the chip shortage than many other automakers. Reporting its sales numbers on Friday, the company sold 475,327 vehicles during the second quarter, a 9.6% increase from the prior-year period. Analysts had expected anywhere between 10.5% and 20.5% growth.
A more worrying sign came from Ford’s sales numbers for the month of June. June sales were down 26.9%, including a 30% drop in F-Series pickups. Sales dropped to zero for several models, including the Fiesta and Flex, as inventories dwindled.
Previously, Ford estimated it would lose half of its second-quarter production due to chip shortages. Earlier this week, it announced additional production cuts extending through July, which should further impact sales despite record turn rates at dealer lots.
One highlight of the quarter was that Ford’s EV sales increased 117% in June, leading to a sales record of 56,570 vehicles in the first half of the year. EV sales, turn rate efficiencies and higher average prices helped mitigate the negative impact of production cuts.
Tesla
EV automaker Tesla (TSLA, Financial) reported record second-quarter vehicle deliveries of 201,250, surpassing the 200,000 mark for the first time. However, this fell short of the 202,800 deliveries that analysts had been anticipating.
Tesla did manage to produce more vehicles than it delivered over the three-month period, securing enough materials to produce 206,421 cars despite global chip shortages. Of the vehicles produced, 204,081 were its more affordable Models 3 and Y, showing that demand for more affordable models continues to grow faster than demand for the more expensive Models S and X.
However, the company did still experience its own share of supply chain headwinds. It made several design changes and raised prices “due to major supply chain price pressure industry-wide. Raw materials especially,” tweeted CEO Elon Musk.
Tesla seems to be doing better than legacy automakers in terms of securing supply chain advantages, which could help it deliver superior results throughout the rest of the year. The positive effects from this might be mitigated by its recall of 285,000 vehicles in China over an error that causes unintended cruise control activation in some models. It is not yet clear how much this mistake might impact its brand image in China in the long run, but Tesla’s May sales in China were halved.
Ongoing chip shortages
In 2020 alone, global semiconductor sales increased 6.5% to $439 billion, according to the Semiconductor Industry Association. This growth occurred despite automakers cancelling chip orders in large quantities during the pandemic due to the dim short-term industry outlook at the time.
In order to continue operating and making a profit, foundries had to find other markets that were doing well in spite of the pandemic, and they found plenty as the pandemic crisis led to the acceleration of global digitalization. This put automakers in an even more difficult spot when they tried to order more chips, only to find that production capacity simply wasn’t enough.
For the 2021 to 2026 period, the Semiconductor Industry Landscape report expects the market for semiconductors to see a compound annual growth rate of 6%, driven by consumer electronics, artificial intelligence, internet of things and advanced customized chips.
"In the supply chain, missing just one part means you cannot produce the entire vehicle that uses the part,” commented market analyst Jon Gabrielsen on the automotive chip shortage. “But with chips, it is any one of dozens of chips. And unlike a temporary delay due to a late shipment or even COVID impacting a single supplier plant, it takes years to design, build, and start up a chip plant so getting beyond the situation is not a short-term issue."
Many automakers say they are “hoping” the chip shortages will abate in the second half of the year, but not only are legacy automotive supply chains often inefficient, they’re also at the back of the line in terms of priority when it comes to semiconductor production.
"They might get the chips by the third quarter of this year [then] they'll finally start seeing production but it will not be until the first half of next year potentially, that you will see cars with chips that they were asking for to run intelligent smart systems, ABS brakes or powertrain," Mario Morales, program vice president of the semiconductor group at market research company International Data Corp. (IDC), said.
Conclusion
High demand for automobiles and investments in EVs have helped propel legacy automotive stocks higher so far in 2021, though pure-play EV companies have seen mixed results due to sky-high stock prices that are driven more by optimism than reality. General Motors has returned 41% year to date, while Ford is up 75%. Tesla, meanwhile, is down 3%.
As production slowdowns and chip shortages continue, they are finally beginning to drag on sales in a meaningful way despite heightened demand. There simply isn’t enough inventory, and this is likely to cause automakers to report disappointing numbers in the second half of 2021.
Whether plummeting inventory and sales in the second half of the year will have much of an impact on stock prices remains to be seen. The stock market is running hot, and in many cases, the markets are overlooking disappointing sales results on optimism for future growth. However, if earnings disappointments do bring an opportunity for investors to pick up shares of automotive stocks at cheaper prices, they could be a worthwhile buy in anticipation of when semiconductor production is able to catch up with demand.
