Moody's: Ford, GM face big earnings drop from chip shortfall

Bloomberg

The global semiconductor shortage will slash earnings at General Motors Co. and Ford Motor Co. by about one-third this year as supply constraints hamper production and profits, Moody’s Investor Service estimates.

The chip shortage will materially erode margins and could lower expected earnings before interest and taxes by as much as $2 billion for GM and $2.5 billion for Ford, the ratings agency said in a note published Tuesday. GM’s EBITA margin could fall to 3.4%, while Ford’s could dip as low as 1.8%, according to Moody’s.

The Ford company logo is displayed on a sign above the Chicago Assembly Plant on February 03, 2021 in Chicago, Illinois. Ford has cut production at the facility from three shifts to one as an ongoing microchip shortage continues to take a toll on the auto industry.

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Rising demand for the chips needed to build technologically advanced and connected vehicles has introduced a new set of challenges for the North American auto industry, with shortages triggering production cuts and temporary plant closures, Moody’s said. Demand from consumer-electronic companies exacerbated the supply shortages amid the coronavirus pandemic.

Next week, Ford will idle an assembly plant in Ontario, Canada, where it builds Edge and Lincoln Nautilus sport utility vehicles. The company said that plant will shut for a week due to the chip shortage, the latest in a series of temporary shutdowns and line slowdowns caused by the lack of semiconductors.

The situation could deteriorate further after weather-related challenges in large parts of the country added to the component shortage, Bill Rinna, director of vehicle forecasts at LMC Automotive, wrote in a report on Tuesday. North American production is likely to be hit hardest in the first quarter, with pockets of disruption emerging to a lesser extent in the second quarter, he said.

LMC reduced its production forecast by more than 250,000 units, with the possibility of another 100,000 units lost, for the first quarter, Rinna said. The production loss across North America as of mid-February is estimated to exceed 190,000 units, he said.

“We do not see inventory returning to normal levels until the fourth quarter of this year, or the early part of next year,” Rinna wrote.

Earlier this month, both automakers said they could experience earnings reductions in line with what Moody's predicted Tuesday.

The short supply of semiconductors could result in a 10% to 20% production loss in the first quarter for Ford. If current estimates were projected across the first half of the year, the shortage could result in an adjusted pre-tax earnings loss of between $1 billion and $2.5 billion this year, Chief Financial Officer John Lawler said during Ford's earnings release call.

GM said during its earnings call  the microchip shortage could deliver a $1.5 billion to $2 billion hit to earnings this year.