Chip shortages make manufacturers prioritise how to allocate resources

Chip shortages make manufacturers prioritise how to allocate resources

The chip shortage is persisting and spreading. But there may be a good side to it after all.

Despite all the moaning and groaning around the lack of semiconductors, globally have posted pretty stellar results even as they’ve had to idle facilities and halt some production.

Hyundai Motor tripled its profits in the first three months of 2021 compared to the same period a year earlier. Orders for Volvo’s trucks more than doubled in the first quarter and operating profit rose 66 per cent. Daimler has forecast that the Mercedes-Benz unit is going to be the most profitable it’s been in years. Profitability for the German company’s cars division rose 15.2 per cent in the first quarter, up from 2.2 per cent.

Resurgent demand underpinned these results. In the US, car sales are tracking close to their highest in three years and heading to pre-pandemic figures. The levels of vehicle stock in China were down to 1.5 months in March, compared to 2.7 in the same period in 2020 at the height of Covid-19 there. Globally, demand is expected to rise by as much as 12 per cent, a pace not seen since 2010.

All told, people want cars, but can’t turn out as many as they want (or at least, how many they thought were needed). Manufacturers are warning that production will continue to be affected because of the deepening chip crisis. That means the growing demand-supply imbalance is here to stay a while. This warrants a moment of pause.

For now, the asymmetry is working in favour of the industry. New car prices are close to record highs and those for used vehicles are also heading higher. With capacity constrained, the shortage in parts has forced manufacturers to prioritise what they make and how they allocate limited resources.

It’s also shaken complacent to move away from grinding out millions of cars that consumers don’t necessarily want while trying to trim costs. They’re now making fewer, better or higher-margin vehicles. That could help them take back bargaining power.

The days of pushing out all sorts of cars, hoping to reach every hypothetic­al buyer and then luring them with a multitude of sweeteners, seem over for the foreseeable future. In­centives that were near multi-year highs pre-pandemic are dropping. In China, the largest auto market, some dealers are looking to reduce discounts on certain Volkswagen-made Audi models as luxury car prices inch up.

In the US, more crossovers and sport-utility vehicles like Honda Motor’s CR-V and Toyo­ta Motor’s RAV4 and High­lander were sold in the first three months of 2021 from a year earlier. Buyers took home fewer midsize sedans. Hyundai pushed SUVs to more than 40 per cent of sales, even though the company has had to suspend production at some of its assembly lines.

The question is, how long can the maintain this performance?

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