Rubber semiconductor shortages add to headwinds for automakers
This report from McAlinden Research Partners takes a look at the issues facing automakers, including the shortage of chips and rubber.
After a 2020 roller coaster for automakers, 2021 is creating headaches for the industry. Currently hampered by the global chip shortage, the woes of automakers are mounting amid a growing rubber shortage that is driving up the price of the material and depleting buffer inventory levels in the industry.
On top of that, the overwhelming transition to electric vehicles is proving to be a sea change for automakers as they struggle to balance future production of gasoline-powered vehicles with the level of production needed to meet demand. growing number of electric vehicles.
Related ETFs and stocks: First Trust NASDAQ Global Auto Index Fund (CARZ), General Motors Company (GM), Ford Motor Company (F), The Goodyear Tire & Rubber Company (GT), Bridgestone Corporation (BRDCY)
The flea shortage has yet to diminish
The global semiconductor shortage continued to hamper the performance of major automakers around the world. Big players like Ford and General Motors have had to institute temporary plant closures over the past month. Some analysts predict the closures will cost the global auto industry $ 60.6 billion in revenue this year.
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As noted by MRP, the shortage could lead to the manufacture of 1.3 million fewer vehicles this year. Global consultancy AlixPartners has a more bearish sentiment, forecasting a drop in production of 2.5 million vehicles.
As it becomes increasingly clear that there is no silver bullet to the chip crisis, major chipmakers are scrambling to put the auto industry first. MRP previously mentioned that Intel CEO Pat Gelsinger plans to ramp up production to bring more chips to automakers within six to nine months.
Now, the US Department of Commerce has called on Taiwan Semiconductor Manufacturing Co. (TSMC) to prioritize US automakers to alleviate their chip shortages. The Commerce Department is holding a “high-level” meeting with US automakers next week to address these concerns, which will hopefully find solutions to allay industry concerns.
MRP recently reaffirmed our LONG Semiconductor theme.
Rubber shortage threatens near future
As if the auto industry needs something else on its plate, a shortage of natural rubber poses an additional threat to tire production.
Natural rubber is harvested from trees, so the material is greatly affected by climate change. In 2019, a leaf disease began to ravage major rubber-producing countries like Thailand and Indonesia, depleting their supply levels. In addition, the loss of auto production due to the COVID-19 pandemic has done little to encourage farmers to plant trees. It takes six to seven years for natural rubber trees to mature, so now that demand has increased, a rubber deficit is looming on the horizon.
For this reason, industry watchers expect this year to be the start of a cyclical, multi-year rally for the price of rubber. In the first three months of 2021, the price of natural rubber increased by 58%. Natural rubber hit a four-year high of $ 2 / kg at the end of February, and some industry executives expect that number to climb to $ 5 / kg over the next five years.
Bloomberg recently reported that excessive storage in China has only made the scarcity worse. China bought more than 5 million tonnes of materials in 2020, compared to 0.85 million tonnes from the United States, a worrying sign for domestic automakers.
Recent talks with executives from Goodyear and Bridgestone suggest that domestic tire manufacturing is going according to plan with a rubber supply that remains strong, for now. However, supply is most likely to tighten later in the year and should be watched closely by investors.
The transition to electric vehicles is more complex than expected
To confuse matters even further, the overwhelming transition to a clean energy future has forced the auto industry to step up production and development of electric vehicles (EVs). The electric vehicle market is expected to reach $ 1.9 trillion by 2028, with all the major automakers trying to get a share. This sudden change leaves automakers scrambling to predict how many new electric vehicles they are expected to make and the suitability of gasoline vehicles in the future.
Major players have made recent announcements to promote cleaner transportation. General Motors has plans to phase out all of its gasoline-powered vehicles by 2035. Ford and BMW have positioned themselves to take advantage of the transition by investing $ 130 million in a battery-powered startup, solidifying on the electric vehicle market.
This projection could ultimately make or break some auto companies. Bloomberg said if the electric vehicle market climbed 30% by 2030, that would leave 40 million vehicles in surplus for gasoline-powered cars, or around 200 unnecessary factories. The transition to EVs also won’t be a straight line, as Business Insider recently reported that 20% of EV owners in California have reverted to gasoline-powered cars, mostly due to inadequate charging infrastructure. .
In short, if companies bet too big on electric vehicles, they will end up with excess inventory and lost revenue. If companies don’t invest enough, they will miss out on the huge benefits of massive change in the industry.
The semiconductor shortage has no end in sight, and the growing scarcity of natural rubber is expected to further hamper the industry. Trying to time EV adoption to maximize profits turns out to be an impossible task and only adds to the headwinds. The auto industry has been looking forward to a tumultuous 2020 looking forward to 2021, but it looks like this year will cause just as many headaches for automakers around the world.
Investors can gain exposure to the automotive industry through First Trust NASDAQ Global Auto Index Fund (CARZ).
Originally published May 6, 2021.
McAlinden Research Partners (MRP) provides independent research on investment strategies to investors around the world. The company’s mission is to identify investment themes that generate alpha at the start of their deployment and bring them to the attention of its clients. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as Chief Investment Officer of Morgan Stanley Investment Management, where he oversaw more than $ 400 billion in assets, form the basis of the strategic research that MRP now brings to hedge funds, funds pension funds, sovereign wealth funds and other asset managers around the world. world.
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