A Reuters/YouTube discussion (host Chris Collins with reporters Stephen Nellis and Ben Klayman) about the global semiconductor shortage and its effects. They explain the shortage arose as pandemic-driven consumer electronics demand depleted chip inventories while automakers cut orders early in the pandemic, creating a supply-demand mismatch. The shortage is tightening production across industries (Apple warned of a 5–6% revenue hit), forcing automakers to idle lines and lose production (Ford estimated ~1M vehicles and $2.5B hit; GM ~ $2B), boosting dealer profits and used-car prices; recovery is expected to start slowly after Q2 and into next year.
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The big topic here is the shortage of chips in the industry. I believe that I've contributed to that because I got the Moderna chip twice. So they gave it to me twice. I know a lot of countries don't have access to the vaccines and the chip like we do here in the US but what is. And maybe you can start, Stephen, what. What is the. The cause of. Of the shortage in chips?
So the cause is actually pretty simple. It's that too many people want them, right? And it's for everything from laptops, like the equipment that we're using to do this, this podcast, right? So what happened is, last year during the pandemic, lots of people bought electronic stuff. So a lot of people got a new phone, got a new camera. A lot of people had to get a laptop if they were going to work from home. What that basically did is took all the inventory that had been sitting around in the chip world and basically sucked it dry, made the situation very tight. And, you know, Ben can actually speak more of this from the automaker's perspective. But at the same time that was happening, the automotive world was sort of having a collapse. And, you know, about a year ago, and so those guys said, we don't know if we're ever going to make cars again, if people are ever going to drive back into cities. So they wound things down pretty tightly and quit putting orders in. And the key thing to remember here about chips is that it actually takes a long time to make one. It's a really complicated process.
If I come to you and be like, dude, Chris, I need it shipped now, you'd be like, cool, come back in about 12 weeks and I'll have it ready for you. So you've got this combination of all the inventory is cleaned out because of the pandemic boom. Like, one of the companies I cover here at Reuters is Apple, right? Their sales have been on fire, so they've been selling lots of goods that cleaned all the inventory out. Carmakers didn't really know what their plans were going to be, and it all came crashing together sort of at the beginning of this year.
So, Ben, is the situation that the automakers panic, and then the automakers also have a secondary market where you have Bosch and Siemens and Johnson Controls and all these other companies that make parts for them, so they panic on them, then they stop ordering, and then the other industries pick up those orders. So like Apple says, well, let me take that. That inventory or that production, and what happens?
Like, exactly, Chris. So, you know, go back to May and June of last year, the auto industry in the US shuts down. So those guys immediately the automakers turn to their big suppliers, the names that you mentioned, and say, hey, we don't need those parts so you can stop ordering them. So they did. And as Steven pointed out, the consumer electronics industry was more than happy to step in and take up the slack. And the automakers thought like, oh, we're not going to have, even when we come back, demand's going to come back slow so we don't have to worry about this. Well, they were wrong. It, you know, demand came back with a vengeance. And so they're selling cars like crazy and they need to get all the chips they can. And obviously they're coming up far short. And the other irony of this all is, is the automaker is used to being the 800 pound gorilla with its suppliers like the ones you named. However, in the chip industry, the automakers are a rounding error. They don't have the power there. So it's not like they can muscle their way to more chips.
Yeah, it's probably important to point out too that even the 800 pound gorilla, which is Apple in the chip business, they are getting pinched by this too. Right. They just said last week that they're going to have a hint ahead of about 5 to 6% of their revenue. So even the mightiest company in this business is getting pinched. Now obviously that's a lot different for Apple saying we'll sell a few less iPads and Macs, which are not their flagship product, like the iPhone. Right. Versus Ford saying, hey, we don't know if we can make the F150 right now.
And so what? And I believe in article you guys wrote, you were, or I think you were talking about that they've asked judges to step in or they're trying to ask judges to step in and give the automakers priority. And the judges have said, oh, we don't want, we don't want to get into that because it's not fair.
Right.
And so they can't even wield their power in court.
Yeah, that was one case with a particular supplier. But yeah, the judge knew that if she actually had ordered the chip makers to supply this parts maker with the chips, she would have been opening a can of worms. Because how do you decide which industry or which supplier gets what? I mean, that same kind of thing is happening in D.C. where they're weighing how they handle things. They don't want to step in and say, oh well, you got to do this for the auto industry, because if you favor one, that by definition means you might put someone else in another industry at disadvantage.
And so the way that we sit here right now, I believe the list of manufacturers not shutting down factories is longer than the one of the factories being shut down. Correct. Because just about every manufacturer is being affected by this. Right? I mean, it's from BMW to GM to Ford, everybody is, is being affected. What is the recovery time and how, how, how bad is it? Like, how long does it take to dig out of this?
Well, I mean, it's funny, you know, over the last week we've had all the automakers basically agree that the second quarter is going to be worse than the first quarter. That's going to be what they think is the bottom. Now I have to point out they previously said that the first quarter would be the worst and would be the bottom and we would start to recover. So they've been wrong before, but the current thinking is second quarter is the bottom. We start to slowly recover after that, although it lingers through the rest of this year and we start to get back to some normalcy next year. Now, whether that happens or not, you know, I guess, you know, time's gonna tell, but they've been wrong before.
So they're, they're trying to manage propaganda while they figure it out, but we don't really, we don't know the extent of it until we do, basically.
Right, yeah, that's fair. I mean, like yesterday, last week, Ford said it was gonna, all told when the year's out, they're gonna lose 1 million vehicles to the chip shortage. So that's a, that's a huge hit. And they said the hit financially was going to be 2.5 billion. You know, GM didn't give a number on the number of units lost today, but they agreed that, you know, second quarter is going to be bad and they're going to lose like about 2 billion to the, to the chip hit.
Now how will this affect the local dealerships and parts suppliers for repairing vehicles and used cars? Because the used car market's going crazy also. But, but chips are involved in a lot of those repairs. Is it going to take a little while for that to be affected in that inventory, or is it coming very soon?
I mean, I'm not as familiar with the used market as to repair parts, but I mean, certainly it is affecting the used car prices because we're seeing demand of new cars are hit and that's causing people to turn to used cars. So the used car demands exploding and the prices are going up there. So it's certainly going to continue to play out. And I talked with a lot of dealers who said.
One dealer said to me, I would take this till I'm in the grave because they're making huge profits right now on getting full sticker price as opposed to the industry historically has always been, okay, you know, what's the deal? What are the incentives? What are the rebates? I'm paying 10, 15, 20% under sticker price. Well, nowadays you're paying full sticker for pretty much any vehicle you want. I mean, GM today talked about the average new vehicle transaction prices on its full size trucks in the quarter were up 10%. And for the big SUVs like the Yukon, those were up over 20%.
Yeah. The financial statements I've been seeing the last couple weeks have blown me away that, you know, new and used apartments that typically maybe would be under $100,000 in profit are making 800, 900. Like the profitability is insane. Thanks so much for watching this clip of Service Driver Revolution. We're uploading new stuff every day, so make sure you subscribe and click the bell icon so you don't miss out. If you have a question you'd like us to answer on the show, call 8333 Ask SDR and we'll answer your question on the show. That's 8333 Ask SDR. For special deals on our books and training, head over to offers.chriscollinsinc.com now that's offers.chriscollinsInc.com I'm Chris Collins and I'll see you in the next video sa.
