Director: Corporate-911
In an industry round table last year, I pointed out that the current narrative when it comes to financial distress is significantly different from the narrative that turnaround professionals are used to. Reduced capacity is now becoming a major issue.
Previously, poorly run companies found themselves in financial distress through their own actions. Currently, well run companies are finding themselves in financial distress where the main driver is external disruption. The external environment is the root cause of a lot of the financial distress that we see today. This forces turnaround professionals to have completely different conversations with their clients in an effort to plan their recovery efforts.
One of the biggest industry disrupters has been the ongoing microchip shortage. As we will discover, this has had a significant impact on global automotive production.
Top of the pile
Before we discuss the microchip shortage, we need to take a step back and look at the global rankings of automotive companies (based on sales).
Based on 2021 sales figures, Toyota is the top automotive manufacturer in the world. VW comes in second place, Daimler is third, Ford is fourth, Honda is fifth, GM comes in at sixth place, BMW is in seventh place, SAIC (a Chinese manufacturer) is in eighth place, FAW (another Chinese manufacturer) is in ninth place while Hyundai is in 10th place.
There wasn’t much movement over the past two years. Toyota and VW swopped places, BMW and SAIC swopped places and FAW jumped two places.
Finally, lets look at the amount of vehicles Toyota and VW manufactured in 2020. Toyota manufactured 7.6 million units while VW manufactured 8.3 million vehicles.
Photo By: Canva
Toyota Cuts Production by 100 000 vehicles
I recently read an article which points out that the microchip shortage is having a significant impact on Toyota as the company recently announced that is cutting production by 100 000.
That will affect company earnings and the financial health of dealers, and it may push consumers to put off new car purchases for months, if not years.
The article adds that two years ago, it was unimaginable that a global car company would cut production. Worldwide demand for cars and light trucks was brisk almost everywhere. That demand remains brisk, but there are not enough cars.
The news means the two US car companies, Ford and GM, could miss their numbers as well. The stocks of both companies have cratered due to low sales volume and suspicions that they cannot emerge as leaders in the electric vehicle part of the industry. That means current and future sales will be compromised.
Microchip shortage anticipated to last into next year
A global semiconductor shortage, which has led to the equivalent of nearly a year of layoffs for local Stellantis autoworkers, will likely continue into next year, according to some auto industry officials. Stellantis designs, develops, manufactures and sell popular automobiles such as Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, Fiat, Jeep, Maserati, Opel, and Peugeot. All of these brands are facing isussues related to reduced capacity.
The article points out that the shortage of semiconductors, which are used in electronics and vehicles, has caused several automakers to halt or slow production over the last two years. According to Unifor Local 444, this microchip shortage has led to 44 weeks of cancelled shifts for workers at the Windsor Assembly Plant.
Industry officials have previously told CBC News that semiconductor companies diverted production to consumer electronics during the worst of the Covid-19 slowdown in auto sales in the spring of 2020.
At the time, global automakers were forced to close plants to prevent the spread of Covid-19, but even since those companies have recovered, there still aren’t enough chips to meet demand. This is a challenge in terms of reduced capacity.
Struggles ahead
The article adds that while Windsor’s auto industry has renewed long-term hope courtesy of several recent announcements, including upgrades to Stellantis’ Windsor Assembly Plant and a new electric vehicle battery plant, the sector still has some struggles ahead.
“We don’t foresee [the shortage] relieving until sometime next year,” Stellantis North America COO, Mark Stewart, told reporters after announcing plant upgrades and new research and development centres for Windsor.
While Stewart acknowledged the cancelled shifts the company has had to face and frustration from workers, he said their team has seen less down time compared to competitors.
He credited that to the effort from workers and demand in the market — which is allowing their plants to continue to receive a supply of chips.
Flavio Volpe, President of the Auto Parts Manufacturers’ Association, told CBC News that he’s hopeful more semi-conductor companies will start production soon. He said that reduced capacity is a significant problem.
Photo By Canva
He said he’s heard from analysts that the second half of the year looks like a return to usual semiconductor volumes and that by early 2023, supply will be up to where it needs to be.
Production has suffered significantly over the past two years. Of the 52 weeks in a year, the semiconductor shortage forced Stellantis to shut down its production plants for 14 weeks in 2020 and 25 weeks (one week short of half a year) in 2021. Imagine being forced to shut down your production facility for half a year? how would that impact your company financially?
Already in 2022, the semiconductor shortage has forced Stellantis to shut down its production facilities for 14 weeks.
The role of turnaround professionals
Reduced capacity is an issue. The automotive industry is one of the most profitable industries in the world. Therefore, you can imagine how the industry is facing massive challenges with some of the worlds smaller manufacturers facing the real prospect of financial distress. What impact will this reduced production have on dealerships? Longer lead times will see customers gravitate towards vehicles that are readily available in the country at the time. This will have a massive impact on companies.
The semiconductor shortage is linked to the global Supply Chain Crisis. To resolve the supply chain crisis, developing countries have an opportunity to develop and strengthen regional value chains through regional pacts. These can ensure that small firms cooperate to reduce transaction costs and benefit from economies of scale.
The article points out that manufacturing in developing economies also needs long-term financing. In countries where the capacity to develop regional manufacturing hubs exists, firms may be unable to tap into value chain opportunities or scale up production when demand rises, because of lack of funding at affordable prices. National and regional development banks need to play a stronger role in this, through new regional and South-South arrangements.
Regional integration could not only increase trade flows but may facilitate structural change, as it may be easier for local firms to export goods with higher value added to regional than international markets. Economic integration through trade agreements may also foster resilience: recent UNCTAD research shows that trade within trade agreements has been relatively more resilient against the Covid-19 global trade downturn.
At the same time, pandemic-driven digitalization requires countries to prioritize their digital infrastructures and supply chain investments. The digitalization of ports and public border agencies is a case in point. Customs automation, pre-arrival data processing, port call optimization and other digital solutions can help speed up port handling and customs operations.
These are some of the discussions that turnaround professionals can have with their clients.
Robin Nicholson is the Director of Corporate-911 and is a Senior Business Rescue Practitioner.
