DETROIT — Strong consumer demand is keeping Detroit’s three automakers optimistic about second-half profits even as a global microchip shortage is expected to extend into next year amid rising cases of the more-contagious COVID-19 delta variant.
The downsides for consumers: rising transaction prices and, in many cases, longer wait times for new vehicles — a trend that is resulting in longer-term auto loans, higher prices for used-car buyers priced out of new vehicles and frustrating delays landing one of Detroit’s hot new products.
Waits often snarled by supply-chain disruptions can be long, as Jamie MacDonald, 48, of Eaton Rapids, Mich., discovered after reserving a new Ford Bronco last July: “It’s just crazy. I’ve moved a vacation based on an anticipated delivery window. Here I am over a year later. I have no clue what’s going on.”
After realizing the benefits of maintaining lower inventories, the Detroit automakers are looking to make permanent some of the changes prompted by the pandemic. Smaller supply means automakers don’t have to offer so much in costly incentives. And dealers can keep inventory costs lower, effectively limiting options and forcing customers to likely order a vehicle to get exactly what they want.
“It’s good to not have the expense of holding a lot of extra inventory and the expense associated with that,” said Jeff Laethem, president of Ray Laethem Motor Village in Detroit. “It’s bad for customers looking for variety and looking to be instantly gratified.”
The numbers tell the tale. General Motors Co. on Wednesday said it now expects full-year pre-tax profits to be between $11.5 billion and $13.5 billion, up from the $10 billion to $11 billion previously given. The Detroit automaker reported record pre-tax profit of $4.1 billion in the second quarter, including warranty recall costs of $1.3 billion, of which $800 million were related to the Chevrolet Bolt EV recall. Pre-tax profits were $8.5 billion in the first half.
Stellantis NV on Tuesday upped its projected adjusted operating margin for the year to 10% from between 5.5% to 7.5%, assuming no further deterioration in semiconductor supply and COVID-19 lockdowns in Europe and North America.
And despite losing about half its planned production volume for the second quarter, Ford Motor Co. last week reported better-than-expected second-quarter results and revised upward its outlook for the full year by $3.5 billion. It now expects adjusted pretax earnings of between $9 billion and $10 billion.
Automakers across the globe are working through a chip shortage that has eaten into inventories even as demand soars. That shortage likely will continue into 2022, but all three expressed confidence in their ability to execute in the second half, even with the current headwinds.
“We continue to monitor COVID very carefully, and factor that in and look for what the potential might be from a COVID perspective especially with the new delta variant,” GM CEO Mary Barra said. “We do believe that, with the strong performance and the work that our teams do, we can deliver these results.”
GM reported net income of $5.85 billion for the first half of the year. Rivals
Ford reported $3.8 billion for the first half and Stellantis reported $7 billion.
Earlier this year, GM said it expected a $1.5 billion to $2 billion hit on earnings from the chip shortage, but CFO Paul Jacobson did not quantify the impact when asked on an earnings call Wednesday, saying instead that the chip issues presented a “lost opportunity” for “even better” results.
The chip shortage, though cutting current production including full-size trucks, is not expected to affect the upcoming electric-vehicle launches of the Hummer EV truck later this year, EV600 delivery van by BrightDrop and the Cadillac Lyriq next year, Barra said.
“The chip shortage remains an overhead for GM and other automakers but ultimately this quarter was another step in the right direction for Barra and the team,” Wedbush Securities analyst Dan Ives said in a statement. “Demand looks robust and ultimately this is an EV conversion story over the coming years with all targets appearing on or possibly ahead of schedule.”
Others in the industry, however, are not as optimistic as the Detroit Three about the second half of the year. BMW AG on Tuesday kept its adjusted operating margin projection between 7% to 9%, expressing concerns over the microchip scarcity and increasing prices of raw materials like aluminum and steel.
“We’ve seen some additional challenges in the last couple of weeks,” Nicolas Peter, BMW’s chief financial officer, said during an earnings presentation. “Will this materialize? Let’s see.”
Worldwide, Stellantis had 772,000 vehicles on dealer lots at the end of June. It globally lost 20% of planned production, or about 700,000 vehicles, in the first six months of 2021 because of unfilled semiconductor orders. North American dealer inventories were hit the hardest, decreasing by 104,000 vehicles from December.
“We feel pretty good about the fact that first half to second half, semiconductors should not get worse, although obviously we need to caveat that with the lack of visibility, frankly, within the supply chain, so there were some discrete events in H1,” Richard Palmer, Stellantis’ chief financial officer, said during Tuesday’s earnings presentation. “Malaysia continues to be a problem for us and others coming into the beginning of this quarter.”
GM ended the quarter with about 212,000 vehicles in stock and expects to see continued high demand and low inventory into and through 2022, CFO Jacobson said Wednesday.
Jacobson also noted the difficulties GM has had with Malaysia, a key manufacturer of semiconductors and where the virus has hit hard recently, but chip challenges are expected to diminish in the fourth quarter.
In the second half of the year, GM will be affected by between $3.5 billion to $4.5 billion of headwinds, including higher commodity prices, Jacobson said. The automaker is anticipating those costs to be between $1.5 billion and $2 billion higher than in the first half of the year.
“We expect North American volumes to be approximately 100,000 units lower in the second half versus the first including some impact from our full-size pickup truck and SUV plants, primarily as a result of some of the near term pressures in Malaysia impacting plants across North America,” Jacobson said. “Otherwise, we expect the robust demand and pricing environment to continue as we get into 2022.”
Ford, too, expects some headwinds in the second half. Executives said last week that higher commodity costs, investments tied to the company’s growth plan and lower earnings from the company’s financial services arm are likely to drive second-half operating profits below the results from the first half.
However, executives indicated the worst of the chip shortage could be behind them and said they expect vehicle production and deliveries to improve over the first half. They also expect to see growth driven in part by a new lineup of vehicles that is seeing strong early demand from customers.
“The primary advantage we have right now is the strength of our product portfolio — and it’s about to get a lot stronger,” CEO Jim Farley said on an earnings call last week. “After effectively managing through the first half, we are spring-loaded for growth in the second half and beyond because of those red-hot products.”
Seeing the success from maintaining lower inventories, Ford intends to lean more heavily on an order-bank system in which customers reserve, configure and order vehicles online, wait for them to be built and then take delivery from their local dealer.
“Navigating these [supply] constraints has led us to make important permanent changes in our business model at Ford. We are modernizing our go-to-market strategy,” Farley told Wall Street analysts.
What that looks like is keeping inventory at 50 to 60 days’ supply and increasing online sales in the order bank system. Ford hopes to have a quarter of its sales come through orders this way, John Lawler, Ford’s chief financial officer, said this week.
Andrew Frick, Ford’s vice president of sales for the U.S. and Canada, said in a statement Wednesday said Ford’s retail order bank had increased by more than 70,000, in July, excluding the Bronco and Maverick retail orders, which is 10 times higher from last year.
In a research note following Ford’s earnings call, Morgan Stanley analysts called Farley’s strategy on moving to an order system “one of the most remarkable events of the 2Q earnings season.”
“In our view, this is part of a bigger narrative change on the go-to-market strategy than meets the eye,” they wrote. “CEO Jim Farley seems to be up to some extremely interesting strategic growth drivers behind the scenes here.”
Dave Kelleher, a dealer in Glen Mills, Pennsylvania, and chairman of Stellantis’ U.S. dealer council, expects it could be a year before inventories return to 60 days.
“Our traffic flow is terrific,” he said, noting he had 42 cars at the start of July, sold 155 and now has 48 in inventory. “I have 148 sold orders. It’s the most sold orders I’ve ever had in the system. If you know how to work it, it’s remarkably efficient. We’re not incurring the giant floorplan costs, the interest costs. It’s my most successful year so far.”
GM’s average transaction price in the second quarter of 2021 was $48,550, according to Edmunds.com Inc., a vehicle information website, up 12% from last year. GM executives expect the strong pricing to continue into 2022.
As far as what the right amount of inventory is, Barra said GM believes “that the optimized inventory level is higher than what it is today, but I think we’d all agree it’s pretty low, much lower than it has been … we’re going to be much more efficient and it’ll be a true partnership with our dealers, as we optimize our system.”