Ford: Excuses after excuse as changing business strategy sabotages supply chain (NYSE:F)

Ford (New York Stock Exchange: F) provided guidance that 40,000 to 45,000 vehicles should be in stock by the end of the third quarter due to a shortage of parts to complete them.Adding insult to injury, Ford said Supplier costs will be $1 billion higher than expected in the third quarter due to rising inflation and persistent supply chain issues. These vehicles are “primarily high-margin trucks and SUVs.”

The Rouge-produced F-150 pickup uses over 800 different chips, and you’ll have to rely on the experts.

Ford’s chief industrial platform officer, Hau Thai-Tang, said, “Ford’s adoption of so-called just-in-time inventory is to keep warehouses slim to minimize costs and reduce the cost to the capital market. We are driven and focused on the return on our invested capital.”

This Just-In-Time Inventory (“JIT”) is a meltdown that occurred in 2000 when rumors of a DRAM shortage spread and end users doubled their purchases to avoid allocating chips to most PCs. Established primarily by the semiconductor industry to prevent downtime.

However, manufacturers around the world use this JIT management strategy that aligns raw material orders from suppliers directly with production schedules. Over the last few years, Ford has changed its EV strategy, resulting in confusion among suppliers, especially second- and third-tier suppliers.

In the early 2000s, U.S. automakers in particular began sourcing lower-cost parts from Asia, and in the process undermining some long-established firms in the U.S. supplier base. . So during the Shanghai lockdown in Q2 2022, there were supply issues from China.

Large Tier 1 system integrators often supply automakers directly from supplier parks conveniently located near vehicle assembly and manufacturing facilities, but underneath the top tier are multiple smaller system integrators. There is a layer of suppliers.

Changes in Ford’s Automotive Strategy

upon January 4, 2022Ford CEO Jim Farley murmured:

“In September, demand for the #F150Lightning was so strong that we doubled our production plan from 40,000 to 80,000 units per year.

As demand continues to grow, we have doubled and now plan to produce 150,000 per year. ”

upon March 2, 2022, Ford announced today that it will split its electric vehicle and internal combustion engine businesses into two separate divisions. Ford Blue and Ford Model e will operate as separate businesses, but will share related technology.

• “The Ford Model E will be a centerpiece of Ford’s innovation and growth, bringing together the world’s best software, electrical and automotive talent to create truly amazing electric vehicles and digital experiences for a new generation of Ford customers. We joined forces,” said Farley.
• “Ford Blue’s mission is to provide a more profitable and vibrant ICE business, enhance our successful and iconic vehicle family, and deliver incredible service and experiences to create a better world. It’s about earning a lot of royalties.It’s about building the future with a century of hardware expertise.This team is committed to delivering the highest quality, lean and We are committed to maximizing cash flow and optimizing our industrial footprint.”

upon July 31, 2022CEO Farley said Ford sees a way to reduce its cost disadvantage by keeping dealer inventories very low and changing the way Ford sells its products. Said there was

While keeping Ford dealers profitable, Farley estimates that low dealer inventory and online ordering account for about $1,200 to $1,300 of the $2,000 cost disadvantage per vehicle. The plan will free dealers from carrying expensive inventories and, at least in theory, allow them to focus more on service and customer education.

upon September 14, 2022Ford dropped the gauntlet at its dealer.

Ford is telling its dealer network that if it wants to become a Model E dealer and sell electric vehicles, it needs to invest, evolve, improve and offer new services.

Ford has given dealers until October 31st of this year (less than two months) to make decisions that will have a significant impact on the future of the franchise. The company offers dealers three options.

1. Become a Model E Authorized Elite Dealer

Model E Elite dealers must install at least two high power DC fast chargers and a Level 2 charging station and provide at least one DC fast charger for public use. Ford estimates the total cost for a dealer to become a Model e certified elite is between $1 million and $1.2 million, with 90% of that cost coming from purchasing and installing the necessary charging infrastructure. due to cost.

2. Become a Model E Authorized Dealer

Model E Authorized Dealers are required to install only one DC fast charger and must be available for public use. However, model e-dealers have a hard cap on the number of EVs they can sell each year, and that number is the same for all model e-shops, regardless of annual sales volume. Ford estimates that it will cost dealers around $500,000 to certify his Model e, with 90% of his costs coming from charging infrastructure.

3. Effective January 1, 2024, we will stop selling Model E vehicles.

If they choose that route, they’re giving up their right to sell Ford’s fully electric vehicles for three years.

Shortages and ICE vehicles

As shown in Chart 1, US new car sales struggled in Q2, up slightly from Q1 and down more than 20% from Q2 2021.

Importantly to note, EV sales of battery-powered electric vehicles (pure EVs) soared to 196,788 units, a record high and up 66% from Q1 2021. With petrol stations on every corner, prices have dropped by about 20% over the period.

chart 1

Global EV sales in 2021 will grow by 108% year-on-year, while the overall fleet of vehicles (EVs and ICEs) will grow by only 4.6%. In North America, less than 10% of his vehicles are EVs, according to Information Network’s report “Global and Chinese EV Batteries and Materials: Technologies, Trends and Market Forecasts.”

According to Cox Automotive:

The total supply of new vehicles not sold in the US stood at 1.23 million units at the end of August, up 31% year-on-year, or about 287,000 units.

In August 2022, we had 40 units in stock. We had 930,000 units in stock at the end of August 2021, with 27 days of inventory.

The average listing price at the end of August was $46,624, up from the revised $46,426 at the end of July. The listing price is 11% higher than his August one year ago.

not just ford

General Motors (GM) recently temporarily closed its Silao plant in Mexico, which makes Chevrolet Cheyenne and Silverado pickups. Kentucky’s Bowling Green Assembly also shut down his operations for a week, affecting Chevrolet’s delivery of his Corvette Stingray, causing delays to be recorded.

In April 2021, GM had to close for two full weeks its Spring Hill Assembly in Tennessee, which makes the Cadillac XT5, Cadillac XT6 and GMC Acadia. Also halted production of the Chevrolet Blazer at the Ramos Assembly in Mexico and the Chevrolet Traverse and Buick Enclave at the Lansing Delta Township plant.

All affected GM vehicles are ICE vehicles, not EVs. GM currently has four EV models.

• GMC Hummer EV
• cadillac lyric
• Chevrolet Volt EV
• Chevrolet Volt EUV

Where is the shortage of semiconductors?

Automakers have struggled with various supply chain issues, especially computer chip shortages, which have slowed vehicle production for the past two years.

Automakers like Ford canceled chip orders early in the COVID-19 pandemic as demand for new cars plummeted. Meanwhile, with factories closed, tech companies bought out all the chips and the industry as a whole faced months of waiting before production ramped up again.

Chart 2 shows IC shipments from July 2019 to July 2022. It shows the 3-month moving average (3mma) of shipments, with a strong positive trend line (dotted line). Shipments show a decline from January 2020 to June 2020. This was initially the result of cyclical trends and then the heavy impact of Covid-19. again, mother unit production. Again, since May 2020, production has declined significantly and then recovered (orange line).

chart 2

Figure 3 shows shipments of various types of chips, including microcontrollers (red line). Here we can see that MoM shipments of various chips, including microcontrollers, have declined since September 2021. However, although it recovered in March 2022, it declined again due to the lockdown in Shanghai, China, and has since recovered. Most of the chips used in the production of electronic products are sent to China for placement in finished final products. Due to the Shanghai lockdown, these products can no longer be sent to or received from China.

chart 3

In June 2021, my analysis of the “shortage of semiconductors” was published in the June 17, 2021 Seeking Alpha article “Microchip Technology: Benefiting From Strong Microcontroller Demand And Shortages”. I attributed it to the shortage of microcontrollers in Japan.

“Importantly, the February 2021 earthquake halted production in Hitachinaka City, Ibaraki Prefecture for several days and reduced inventories. A fire broke out at the N3 building in the prefecture, a component manufacturing site based in. The blaze destroyed 23 semiconductor manufacturing equipment and contaminated more than 6,400 square feet of industrial production space.Production resumed in June. It reached 100% capacity in mid-April, a Japanese chip manufacturing plant owned by Renesas Electronics Corp., which accounts for 30% of the global market for microcontroller units used in automobiles.”

Tips for investors

To understand the “semiconductor shortage,” you need to look no further than gas stations. A clear focus of current government administrations around the world is to eliminate fossil fuels in ICE vehicles and replace them with EVs, a green renewable energy source.

“The average electric car has about 2,000 chips, which is about double the number of chips in the average non-electric car,” said U.S. Commerce Secretary Gina Raimond in late 2021. says. % Affected.

Table 1 shows the number of vehicles sold, revenue/vehicle, and profit/vehicle for automakers. As the bottom line of the curve shows, vehicle sales for these manufacturers averaged -2.7% year-over-year growth, while revenue/vehicle increased by 8.7%. Most importantly, profits per vehicle increased by an average of 37.9% year-over-year during the recovery from the COVID-19 pandemic, when automakers closed factories and complained of “semiconductor shortages.”

Ford made a profit of $4,551 per vehicle in 2021, but lost $305 in 2020. His per-vehicle profit at Mercedes-Benz Group (DDAIF) and Tesla increased by three digits year-over-year.

Chart 4 shows the rating summary and factor grades.

Figure 4

As shown in Chart 5, Ford’s vehicle revenue is positive for the company.

Chart 5

By expanding its SUV lineup to include the best-selling Bronco, Ford is giving a wider appeal to drivers looking for this kind of vehicle. As with pickup trucks and EVs, Ford’s move seems to be paying off. The company said he sold more than 102,000 Ford Explorers and about 74,000 Ford Escapes in the first half of 2022, putting both his SUVs among the 25 most popular models in America.