Biden to meet with auto executives about a painful chip shortage

During his 47 years at General Motors, Clarence E. Brown has faced union strikes, plant closures and layoffs due to parts shortages.

But Brown, president of a local branch of United Auto Workers in Kansas, describes the ongoing semiconductor chip shortage that is costing automakers billions and huge temporary layoffs as more “disappointing” than previous work stoppages because he feels it could have been avoided.

“I’m not a corporate multimillionaire, but it doesn’t take a rocket scientist to know there’s something wrong with this,” he told CNBC. “I’ve been with General Motors for over 40 years, and in all 40 years they’ve taught me one thing: where’s ‘Plan B’? If ‘A’ doesn’t work, then where’s ‘Plan B’? be done so that this will never happen again. “

The White House will hold a virtual CEO Summit Monday afternoon where President Joe Biden will meet with executives from the automotive, technology, biotech and consumer electronics industries to discuss the chip shortage. Planned attendees include GM CEOs Mary Barra, Ford Motor’s Jim Farley, and Intel’s Pat Gelsinger.

Motorists began warning of a shortage of chips late last year. Those warnings soon turned into temporary factory closures for the auto industry, forcing auto manufacturers to temporarily lay off tens of thousands of American auto workers since the start of the year. Brown’s roughly 2,000 hour workers at GM’s Fairfax Assembly plant were among the first to lose work when the plant was shut down by GM in early February due to the shortage of parts.

“I just hope that the people in charge, including the president, can come up with a plan to stop this from happening,” said Brown, who met Biden during a campaign visit to the plant in 2019. “It’s not just General’s job. Motors or Ford or car. This also has consequences for other parts of this country. “

But experts and company officials say Biden can do little or nothing to force chip makers, most of which are in Asia, especially Taiwan, to spend more on the US auto industry. Biden could try to pressure them. He has also backed proposals for tax breaks for US manufacturers to make the critical parts in America to avoid future shortages.

“One of our hopes would be that we could come out of the meeting with a path and roadmap to once again fulfill 100% of automotive semiconductor orders and have some real insight and transparency into what that timeline might look like,” said Matt Blunt, chairman of the American Automotive Policy Council, which represents GM, Ford and Stellantis NV.

Blunt, the former Missouri governor, said producing more semiconductors domestically is a twofold issue because of the “significant impact the auto industry has on the US economy and the significant negative consequences of this semiconductor shortage.”

Consulting firm AlixPartners expects the shortage to cost the global auto industry at least $ 60.6 billion by 2021.

According to Biden’s $ 2 trillion infrastructure proposal unveiled earlier this month, $ 50 billion was destined for the US semiconductor industry. On February 24, he also commissioned a 100-day review of US supply chains for advanced batteries, pharmaceuticals, critical minerals and semiconductors.

Semiconductors have extremely long production schedules and lead times due to the amount of materials and components used in the chips. Only about 12% of it is produced in the US, according to officials.

Semiconductors are key components in the automotive sector, used in infotainment, power steering and braking systems, among others. With several factories shut down due to Covid last year, suppliers sent semiconductors away from automakers to other industries, creating a shortage after consumer demand returned stronger than expected. The parts can contain different sizes and types of chips.

Tom Quillin, Intel’s senior director for security and trust policy, said last week that the technology giant “sees America at a critical tipping point” in semiconductor manufacturing – not just for the automotive industry, but also for the technology industry.

“How the US government invests in the semiconductor industry is likely to determine the future of US domestic technology innovation and global leadership,” he said during Thursday’s virtual discussion on the CHIPS for America Act organized by the Department of Commerce.

The three-hour forum included technical executives as well as leaders from smaller companies and policy groups, including Blunt and John Bozzella, CEO of the Alliance for Automotive Innovation, which represents the vast majority of automakers with US operations.

Bozzella urged the Biden government to adopt policies that encourage US manufacturers to build semiconductors in the US, including an investment tax credit that “could help companies cut the cost of creating new lines within existing facilities or reassigning current production to meet changing needs ”.

There are numerous reasons why car manufacturers are not a top priority for chip manufacturers. First, according to officials, the auto industry only accounts for 5% or less of the world’s chip usage. Many of the chips the industry uses are older or ‘legacy’ products in which many companies are unwilling to invest. They instead focus on more advanced semiconductors for technical and consumer products.

Michael Hogan, a senior vice president of chipmaker GlobalFoundries, who is expected to attend Monday’s meeting with Biden’s administration, said those chips are still competing with consumer products for delivery at “multiple levels of the supply chain,” even though they are older.

“These times today are unprecedented, extraordinarily difficult, but I think that, ironically, provide the best possible outlook for the industry and the country if we act now and act boldly in funding the CHIPS Act,” he said last week at the forum.

Depending on the vehicle and options, experts say a vehicle can have hundreds of semiconductors. Higher vehicles with advanced safety and infotainment systems have much more than a base model, including different types of chips.

Automakers are prioritizing the assembly of more profitable vehicles, such as full-size pick-ups, by reducing the production of cars and crossovers. The Detroit automakers are even partially building pickups to complete and ship at a later date.

According to Smith & Associates, a Houston-based independent distributor of electronic components, the shortage will have caused significant price and demand increases in 2021. According to the company, some open market prices have risen five to 20 times this year.

“Demand for automotive semiconductors has been growing steadily since the beginning of the year,” said Marc Barnhill, Smith’s Chief Trading Officer. “Smith’s market intelligence now points to an even further deterioration in turnaround time and rising demand. There has never been such a shortage of semiconductors in the automotive sector, and it is far from over.”

Motorists have labeled the chip shortage as fluent. GM, Ford and others have said the deficit will cut billions in their revenues by 2021.

Automotive research firm LMC Automotive predicts that the global automotive industry will produce 811,000 fewer vehicles this year, including 175,000 in North America. The forecast largely takes into account a drop of nearly 1.4 million in global vehicle production during the first quarter, which is expected to be offset in the second half of the year.

“The industry is facing a very different environment than it has been in quite a long time,” said Jeff Schuster, LMC president of America and global vehicle forecasting. “We’ve said that a few different times for different reasons, but this one is unique in that they can’t build what they want and what they could sell. That will probably continue into 2022.”

GM expects the problem to reduce its operating profit by $ 1.5 billion to $ 2 billion this year, while Ford said the situation could reduce its revenues by $ 1 billion to $ 2.5 billion by 2021.

The financial impact of the deficit has not been lost for Brown, president of UAW Local 31 in Kansas. But its members, like many factory workers, just want to go back to work building the Chevrolet Malibu and Cadillac XT4.

“With these locals, we have stayed together through the tough times and now we stick together,” he said. “I hope and pray that the shortage will be over as soon as possible … and I would like to think that after this we have more of those jobs in the United States to make sure that if something happens we can cover ourselves . “

– CNBCs Michael Bloom contributed to this report.