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Industry Buzz - May/June 2021

By: Lou Koehler

We’ve beaten COVID-19 as over 60% of the country has been vaccinated and consumers go on a spending rampage. Cars are flying off dealer lots with April’s 1.5 million sales (18.5 million SAAR) more than double a year ago and a solid 14% above 2019. Ah, but with the good also comes the bad news. The stubborn computer chip shortage is hindering production at all the automakers leading to the lowest inventory levels in decades.  Ford’s lack of semi-conductors will force it to slash second quarter production by half, even canceling several weeks output of its highly desired, highly profitable F-150 pickups. They expect improvement by July, but who knows? An industry veteran with reliable inside sources claims the problem will persist into 2022 as strong consumer sales and rebuilding of fleet inventories fuel high demand.

In a Wall Street Journal interview, Jerry Sanders, founder of Advanced Micro Devices and former chairman of the Semiconductor Industry Association, explained the dilemma saying demand for chips in electronic devices (PC sales rose 32% in the first quarter) has exploded over the years, shrinking the auto industry’s share of the chip market to around 10%. “Auto companies slashed chip orders at the outbreak of COVID-19, forcing chip makers to contract with non-automotive customers and were surprised when demand recovered and chip producers couldn’t rapidly respond.  It takes 12 weeks on average to make a silicon wafer, and that’s before back-end assembly and shipping around the world.” In response, President Biden says his government is “studying” supply chains. Mr. Sanders dismisses the effort explaining that every knowledgeable person in the industry knows government policies and subsidies are irrelevant. “Market players will fill this chip shortage before Democrats and Republicans finish arguing about whose fault it is.”  His solution: “Do nothing and let the invisible hand fix the problem free of charge.”

Similar problems are cropping up throughout the entire supply chain as companies scramble to match production with surging consumer spending. The head of a powder producer commented that “eventually market forces will catch up, but for now it is challenging and that will likely be the case for some time.”

Most of the non-automotive side of our business is enjoying a brisk recovery. Lawn and Garden products are jumping off shelves and RV sales are brisk.  It appears that only Oil & Gas and Aviation have not joined the party.

I recently spoke with several equipment company executives and was pleasantly surprised to learn business has returned to normal levels. In a “normal” recession, equipment orders are the first to feel the impact and the last to recover. Not this time. The downturn was deep but short. Typical was the experience was reported by a well-respected CEO. “We had a fairly good backlog entering COVID-19  but our parts and service business bottomed out last June. Sales dropped 50% from Q1 to Q2 2020. Beginning early this year we saw a hefty 45% pick-up in orders. As a result, our backlog returned to 2018 levels which was a good year.” A second executive reported a similar experience. “Entering 2020 we had a strong backlog which carried us through most of the year. Late in 2020 and during first quarter 2021 orders became very strong. Our backlog is back up to where it had been.”  Service business at both companies was curtailed by the inability of technicians to travel. With continued labor tightness, most companies ordering new equipment are maximizing available automation as part of their order.

Vaccines are in ready supply and firms have been pushing, not mandating, employees to be vaccinated. How many will step forward to get the ‘Jab’?  The sales manager at an equipment producer related that a “deemed essential” customer arranged vaccinations their 130 employees at a local clinic and only 15 showed up! Another company exec reported better results by inviting a clinic into the plant to administer the shots. Participation was good and he estimates over 60% of his workforce is vaccinated. He further commented that the COVID-19 stretch forced companies to reduce costs which will be reflected in higher profits going forward.

It’s the ‘same old song’ as executives in our industry continue to struggle hiring qualified workers. A powder company executive confided that, “I’m kept awake at night thinking about where to find people. We’ve lost some employees to higher paying industries and those remaining are working excessive overtime which worries me as summer approaches.” He was unsatisfied with the quality of applicants from a temp agency and is now considering bringing ex-convicts on board.

Throughout the country small business owners are echoing Republican claims that the $300/week federal unemployment payment augmenting state benefits is keeping potential workers on the sidelines. The administration counters that it is not the additional benefit but lack of child-care with schools closed and a lingering fear of COVID-19  keeping workers at home. I discussed this with a neighbor who has been out of work since last May. Even when opting for 10% withholding tax he nets $940/week, $49,000/year.  This will continue through September when the Federal $300/week is scheduled to end. His COBRA was formerly $640 per month but with the latest $1.9 trillion stimulus it is now fully subsidized. He asks, “Why work?”  In response to the worker shortage, 22 states have moved to eliminate the $300 federal benefit effective June 1st. Will more follow?

After the passing in 2018 of my most news-worthy auto executive, Sergio Marchionne of FCA, Tesla CEO Elon Musk has filled the void by providing controversial fodder for this column. The ubiquitous Mr. Musk recently served as guest host on Saturday Night Live. An odd choice to follow in the shoes of so many fabled luminaries. In another time, when Belushi, Ackroyd, Chase, etc. led the cast, the lovely Mrs. K and I routinely tuned in at 11:30 to watch their antics. Although it has been years since I caught the show Musk’s planned appearance had me curious. I set the DVR and watched intently Sunday morning. Mr. Musk’s performance confirmed he is better at producing electric vehicles and space rockets than producing laughs with stand-up comedy.  He is certainly in the running for worst guest host ever!

On the business front, Musk continues on a roll. Tesla reported a record $438 million quarterly profit with revenue jumping 74% to $10.4 billion from a year ago on sales of nearly 200,000 vehicles. Tesla’s market value sits around $675 billion. This is nearly five times the combined value of Ford and GM! However, all is not what it seems as all the money was not earned by selling cars. Some was generated from the profit made ($101 million) selling off the Bitcoin it purchased in February and the sale of regulatory credits ($518 million tax free) to rival European automakers that need them to comply with EU emissions-related standards. Further complicating Tesla’s market situation is the growing threat of serious competition. The big auto companies plan to eat into Tesla’s market share. Ford and GM finally seem serious about EV’s. Each announced plans for its own battery factories and Ford is gaining free publicity with President Biden test driving its soon-to-be launched F-150 EV. Volkswagen and Renault are on a path to surpass Tesla’s European sales and in China SIAC, BYD and NIO are producing high quality, lower priced EVs.

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