Robust earnings 
underpinned by vehicle shortage

However, shortages of semiconductors and certain raw materials are now starting to bite: production is slowing down strongly as all manufacturers start to suffer from a lack of raw materials, especially semiconductors. In turn, higher raw material prices and logistic costs are driving up production costs.

UK consumer confidence is starting to weaken as the Government COVID-19 schemes have ended; inflation is rising, and with this comes a decline in disposable income. There is a future risk that, to control inflation, the Bank of England may have to increase interest rates, which will mean that consumer disposable income is likely to fall further.

As can be seen from Q3 2021, a number of OEMs are now starting to see their earnings growth slow since early 2020.

General Motors (GM) struggled in Q3 due to the semiconductor shortage, with unit sales down 479,000 units, causing revenues to drop by US$8.7bn while net profits dropped by US$1.6bn. With fewer vehicles being produced and sold, the business burnt through US$4.3bn of cash. However, GM continued to make a profit for the Q3 2021.

GM Financial performed strongly, benefiting from a recall cost settlement that GM reached with LG Electronics and US$0.3bn in equity income from the joint venture in China. Full-year results are expected to be at the top end of expectations, which suggests that GM has had a strong year benefited by selling fewer vehicles at higher prices and margins.

GM has indicated that it is making some progress on its semiconductor shortage. Like other automotive companies, GM has been building vehicles without semiconductors and parking the vehicles awaiting parts. In the US, GM is halfway through shipping the pickup trucks which have been parked. Their vehicle inventory held in the US dealerships is increasing slowly with a focus on high-value and faster-selling vehicles. However, GM believes that it will be some time until it returns to pre-COVID inventory vehicle stock days of 30-60 days.

Ford’s revenues were down marginally in Q3 2021 compared to the prior year. The business has seen improvements in semiconductor supply in North America. Ford continues to perform well in Europe and remains the number one commercial vehicle brand. The European operation is looking to deliver 6% EBIT margins by 2023; this is to be achieved through its turnaround programme.

Ford also saw further progression in China as its Chinese turnaround programme continued; retail luxury brand Lincoln saw strong sales up 24% and local production of the all-electric Mustang Mach E which it sells direct-to-customers from its Ford Select city stores was strong.

However, in its financial results outlook, Ford has highlighted further issues around semiconductor constraints, and inflationary effects on direct and indirect costs, including raw materials and freight, which may affect future profits. Increased commodity prices are expected to impact Ford’s costs by US$0.5bn for the full year 2021 and could rise by another US$1.5bn in 2022.

Daimler’s results in Q3 2021 saw a 25% reduction in unit sales of passenger cars, mainly due to the lack of selected raw materials and global supply constraints. Daimler indicated in its financial results outlook that demand for cars is likely to remain favourable during the rest of the year. Supply chain difficulties will remain, but semiconductor issues are expected to ease in Q4, although the extent of any improvement is not clear.

Although the overriding structural shortage of semiconductors is expected to remain an issue in 2022, it is expected to improve compared to 2021. The company’s cash flow was affected by the increase in inventory as vehicles manufactured without certain components were stored awaiting a supply of semiconductors. This meant that there was trapped cash in the business, which is expected to be released with the future supply of semiconductors. Daimler Mobility (previously known as Daimler Financial) performed strongly, even though new vehicle volumes declined by 2% in contract volumes, EBIT was up strongly versus that of Q3 last year.

Tesla continued to perform well, despite a backdrop of semiconductor shortages. Automotive revenues increased by 58% as more production of vehicles came online, especially the Model S and Model Y, while revenue for the Model S and Model X declined.

As expected, income from regulatory credits declined by 30%, suggesting that many of the more traditional OEMs – who had relied on the purchase of regulatory credits to offset their emissions – no longer required so many credits. It is likely that there will be less income from these credits going forward as more of the traditional OEMs transition from ICE vehicles to PHEV and EVs.

With the increase in production and deliveries, gross margins in the automotive business rose by 30.5%, up by 281bp year-on-year. Operating income exceeded the US$2bn mark for the first time (including US$279m of environmental credits). However, stock levels were a concern, and global vehicle inventory days of supply was only six days, down by 57% year-on-year. Tesla’s strongest growth was in US, followed by Europe, but China is delivering increasingly strong growth since Q3 2020. We believe this is due to the opening of Tesla’s factory in China, which is now Tesla’s main export hub and produces the standard range vehicles with the shift to Lithium Iron Phosphate (LFP) battery chemistry.

The factory build in Berlin remains on track with testing of equipment well under way. All this good news, plus an announcement from Hertz that Tesla would be supplying 100,000 vehicles to its business, pushed the Tesla share price to above US$1 trillion. Nevertheless, according to Elon Musk: “No contract has been signed yet” between Tesla and Hertz.

Earnings performance by the OEM has continued due to the sale of vehicles at higher margins, but vehicle stock remains at very low levels. In the US market, vehicle stock levels are at an all-time low – see chart below. It is not clear when global production will come back to full capacity; meanwhile, semiconductor shortage is expected to remain until the end of 2021 and into at least the early part of 2022 if not longer. What is not currently clear is how limited the production of vehicles will be and what will be the full impact of the semi-conductor shortage and rising raw materials.