Last year, car makers experienced the cardiac arrest of shutdowns followed by the blood rush of fast-rebounding auto sales. This year, they’re getting both at the same time.
Ford F -9.07% reported record quarterly operating profit after the bell Wednesday while also guiding analysts to a full-year profit below expectations. Since markets only care about the future, the shares fell 3% in aftermarket trading.
The well-documented chip shortage was the main culprit. Ford said it would produce 1.1 million fewer vehicles than planned this year for want of semiconductors, equating to roughly $2.5 billion in adjusted operating profit—the top end of the range it estimated at the start of February.
The confusing thing is that Ford produced 17% fewer vehicles than planned in the first quarter and yet generated far more profit than the company expected. Against a backdrop of strong consumer demand, an undersupply of vehicles as a result of last year’s pandemic-related shutdowns and this year’s chip-related ones is pushing up prices across the industry. Ford made 7% more automotive revenue than in the first quarter of last year by selling 6% fewer vehicles. Skyrocketing used-car prices also boosted its finance arm.
The message from the company Wednesday was that these conditions can’t last. It is assuming automotive operating margins, which reached 12.8% in North America in the quarter, will normalize as purchase incentives creep back up and rising commodity prices feed into raw-material bills. It also expects used vehicle inflation to moderate.
Some of these predictions are more reliable than others. Car makers have good visibility over raw-material prices, and the production impact of the chip shortage is becoming clearer. As the first quarter showed, though, the all-important question of pricing is hard to forecast in such unusual market conditions.
Much depends on how Ford’s competitors have been affected by the chip shortage. So far, General Motors GM -4.16% seems to have maintained output of its big pickup trucks and sport-utility vehicles, whereas Ford has had to trim production of its chief money-spinner, the F-150. If that continues, GM could take market share and what at first looks to be cautious guidance from Ford might simply be realistic. Investors will learn more when GM and Chrysler-owner Stellantis, which makes the RAM and Jeep brands, report next week.
The long-term lesson of today’s semiconductor shortage is that car makers either need to hold higher inventories or work more closely with chip foundries—and probably both. The crisis has also shone a spotlight on other elements of the supply chain. Ford this week announced plans to follow GM, Toyota and Volkswagen VOW -2.69% into the expensive business of building electric-vehicle batteries. This is in part to manage the risk that batteries become like chips: crucial inputs to which some car makers have better access than others in the emerging battle for EV market share.
Ford’s move into batteries and its downbeat profit outlook both betray a fear of getting left behind. For a company that has consistently lagged behind in recent years, that is no bad thing.
Write to Stephen Wilmot at [email protected]
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