[BlackGTP]

GM Misses Profit Estimates as Chip Shortage Crimps Output (msn.com)
David Welch
July 26, 2022

(Bloomberg) -- General Motors Co. reported weaker second quarter profit than analysts’ estimates as semiconductor shortages kept production volumes in check. The automaker also warned it is bracing for tougher times ahead.

Noting “concerns about economic conditions,” Chief Executive Officer Mary Barra said in a shareholder letter Tuesday that GM is taking measures to guard cash flows and rein in costs by cutting discretionary spending and placing limits on hiring.

“We have also modeled many downturn scenarios and we are prepared to take deliberate action when and if necessary,” the CEO said.

GM kept intact its full-year earnings guidance, reflecting robust demand for its highest-priced vehicles and signaling optimism it can procure sufficient quantities of chips.

Shares of the Detroit-based carmaker fell 1.3% in premarket trading to $34.07 as of 6:55 a.m. in New York. The stock had declined about 41% this year as of Monday’s close.

continues at link

 

[BlackGTP]

GM reports rough second quarter with net income of $1.7 billion, warns of cost cuts

No surprise GM also chose to announce the below good news at the same time they reported the earnings miss. Be interesting to see which one makes a bigger impact on today's stock price - so far down 1.3% in premarket trading.

GM signs agreements with suppliers, on course to reach 1 million EV capacity by 2025 (yahoo.com)

 

[InCogKneeToe]

Praise Be to "Mary"

OK, The chip supply issue does hinder Sales, however the Sales that are made are at Record ATP's and without any Incentives. Micro Chips are going to High Profit vehicles like HD Trucks and Large SUV's. Not low (or according to GM No) Profit small vehicles.

So how can you Blame the Chip Shortage?

As a Dealer, we are affected just as badly as the Manufacturer with the Chip/Product shortage, but the Bottom Line remains relatively unchanged. Less Sales at Higher Margins, with less Overhead.

And as for 1 Million EV Capacity, there isn't 1 Million Capacity Demand in North America yet. We all know what Over Capacity causes.

 

[RamJet502]

OK, The chip supply issue does hinder Sales, however the Sales that are made are at Record ATP's and without any Incentives. Micro Chips are going to High Profit vehicles like HD Trucks and Large SUV's. Not low (or according to GM No) Profit small vehicles.

"The company had 95,000 vehicles that it built in the quarter but couldn’t complete due to a lack of parts. About 75% of those are full-size pickups and SUVs"

 

[BlackGTP]

Praise Be to "Mary"

OK, The chip supply issue does hinder Sales, however the Sales that are made are at Record ATP's and without any Incentives. Micro Chips are going to High Profit vehicles like HD Trucks and Large SUV's. Not low (or according to GM No) Profit small vehicles.

So how can you Blame the Chip Shortage?

As a Dealer, we are affected just as badly as the Manufacturer with the Chip/Product shortage, but the Bottom Line remains relatively unchanged. Less Sales at Higher Margins, with less Overhead.

And as for 1 Million EV Capacity, there isn't 1 Million Capacity Demand in North America yet. We all know what Over Capacity causes.

They are at record ATP's, but is that enough to make up for the lost volume in those same higher end vehicles? Meaning did they only produce 2 of those high end vehicle in place of 4?

 

[InCogKneeToe]

They are at record ATP's, but is that enough to make up for the lost volume in those same higher end vehicles? Meaning did they only produce 2 of those high end vehicle in place of 4?

The Ford Camp here.

2022 Price Increases, 2 of them on F150's $1300 then $3900+ Sport/20" Wheel Discount of $550 gone.

So lets say in Increases alone they are making $4200 extra.

No Cash Back/Delivery Allowances/Employee Pricing, another $5000.

All while they were stating $10K profit per F150. Why the Ford F-150 is a profit machine So Yes, they can make more selling 1/2 as many and less Overhead.

The problem is when a Vehicle is built, then shipped to a Holding Station, awaiting 2 or 5 Chips to complete. The Company has nearly the entire Investment made, however No Return. But it will have a Return shortly on a Very Small Investment.

The Profit/Loss Number Game can be played in so many ways. Especially in the Auto Industry.

 

[61BelAir]

So how can you Blame the Chip Shortage?

I don't know about your area, but dealerships around here are pretty barren. High ATP's are great, but you can't sell what you don't have.

 

[BlackGTP]

The Ford Camp here.

2022 Price Increases, 2 of them on F150's $1300 then $3900+ Sport/20" Wheel Discount of $550 gone.

So lets say in Increases alone they are making $4200 extra.

No Cash Back/Delivery Allowances/Employee Pricing, another $5000.

All while they were stating $10K profit per F150. Why the Ford F-150 is a profit machine So Yes, they can make more selling 1/2 as many and less Overhead.

The problem is when a Vehicle is built, then shipped to a Holding Station, awaiting 2 or 5 Chips to complete. The Company has nearly the entire Investment made, however No Return. But it will have a Return shortly on a Very Small Investment.

The Profit/Loss Number Game can be played in so many ways. Especially in the Auto Industry.

Yes, though the 90,000 incomplete inventory sitting in the lots awaiting a chip does not impact their results in quite that way. The costs do not hit the P&L, they don't hit until the revenue is booked. So, in the end GM is hurt by not being able to sell those 90k vehicles by not being able to record the sale and profit. But, if they get a big shipment of chips in and can unleash that stock, then it all hits, so next quarter might be a really good one. But it all depends on those chip shipments, might end up being a wash as the 90k in inventory gets the chips but then they produce a new 90k in vehicles missing parts. This really hits GM's cash flow as the money to make them went out with no cash flow back.

And, GM was still quite profitable

Bottom line is Ford and GM are both very profitable right now without those unprofitable vehicles dragging both down. But, for both it comes down to how they handle their chips from quarter to quarter - take it on the chin this quarter and hoard your chips which sets you up for efficient production in Q3 with all those chips and you have a blockbuster. We've been seeing this for the past two years. Boo-hiss at GM on a bad Q and "look how great Ford is" then forget about that next Q when the roles are flipped and GM is gangbusters and Ford isn't. This is as much as a production efficiency planning game as it is a numbers game.

Or, it is hard to look at any auto company on a quarterly basis because of this, the annual results paint a better picture.

 

[mgescuro]

“We have also modeled many downturn scenarios and we are prepared to take deliberate action when and if necessary,” the CEO said.

That's not ominous at all...

GM kept intact its full-year earnings guidance, reflecting robust demand for its highest-priced vehicles and signaling optimism it can procure sufficient quantities of chips.

I mean, on one side, that's a good thing.
This to me states that GM has focused on selling the higher margin cars/trucks in order to prop up the profit numbers. As such, there are less affordable cars on the market, which will reduce sales numbers, most likely.
Furthermore, even as gas prices are currently declining, they're still pretty high, which can cause additional pressure on GM's trucks, which are the bulk of the high margin cars GM sells.

In short, GM needs more EV's on dealership lots sooner rather than later.

 

[BlackGTP]

That's not ominous at all...



I mean, on one side, that's a good thing.
This to me states that GM has focused on selling the higher margin cars/trucks in order to prop up the profit numbers. As such, there are less affordable cars on the market, which will reduce sales numbers, most likely.
Furthermore, even as gas prices are currently declining, they're still pretty high, which can cause additional pressure on GM's trucks, which are the bulk of the high margin cars GM sells.

In short, GM needs more EV's on dealership lots sooner rather than later.

This chip shortage is almost a godsend for the auto makes going into a recession. No massive pile of cars at dealer lots that need huge discounts to sell in a recession - just a year+ long wait for people desperate to get a vehicle. My guess is that Detroit weathers this recession pretty well vs past recessions, with smaller profits, but much better than losses.

 

[gkr778]

My guess is that Detroit weathers this recession pretty well vs past recessions, with smaller profits, but much better than losses.

+1
The 2008-2009 recession ultimately reduced the number of OEMs headquartered in Metro Detroit to two - GM and Ford. Both those companies emerged from that recession leaner and more fit, though both companies still have their own organizational and strategic issues that will need to be addressed sooner rather than later.

John McElroy of Autoline Daily said back in 2010 that GM and Ford can break even at a 10-million SAAR. I think that's still the case today.

 

[Ed753]

"The company had 95,000 vehicles that it built in the quarter but couldn’t complete due to a lack of parts. About 75% of those are full-size pickups and SUVs"

That's just another excuse, they've had vehicles sitting around for the better part of a year, sure might not have been 95K, but it was at least 1/2 that.

I don't have time at the moment, but a good exercise would be to go back and look at prior quarters, selling fewer, high-priced vehicles is not something new that only happened in Q2 2022...

 

[mgescuro]

This chip shortage is almost a godsend for the auto makes going into a recession. No massive pile of cars at dealer lots that need huge discounts to sell in a recession - just a year+ long wait for people desperate to get a vehicle. My guess is that Detroit weathers this recession pretty well vs past recessions, with smaller profits, but much better than losses.

Yes, in some ways.
It's really a double edged sword. Sure, GM can't make the number of cars it wants to, so it's focusing on higher margin vehicles for now. But that has the potential of idling factories, limiting volume, reducing market share, allows competitors to potentially offer substitute product, etc.
Just remember, the chip shortage is largely pandemic induced. Supply and demand are still largely out of whack. And we're still in the middle of a pandemic, despite all signs to the contrary, so supply-side shocks may still be on the horizon.

 

[InCogKneeToe]

Yes, though the 90,000 incomplete inventory sitting in the lots awaiting a chip does not impact their results in quite that way. The costs do not hit the P&L, they don't hit until the revenue is booked. So, in the end GM is hurt by not being able to sell those 90k vehicles by not being able to record the sale and profit. But, if they get a big shipment of chips in and can unleash that stock, then it all hits, so next quarter might be a really good one. But it all depends on those chip shipments, might end up being a wash as the 90k in inventory gets the chips but then they produce a new 90k in vehicles missing parts. This really hits GM's cash flow as the money to make them went out with no cash flow back.

And, GM was still quite profitable

Bottom line is Ford and GM are both very profitable right now without those unprofitable vehicles dragging both down. But, for both it comes down to how they handle their chips from quarter to quarter - take it on the chin this quarter and hoard your chips which sets you up for efficient production in Q3 with all those chips and you have a blockbuster. We've been seeing this for the past two years. Boo-hiss at GM on a bad Q and "look how great Ford is" then forget about that next Q when the roles are flipped and GM is gangbusters and Ford isn't. This is as much as a production efficiency planning game as it is a numbers game.

Or, it is hard to look at any auto company on a quarterly basis because of this, the annual results paint a better picture.

How can those awaiting Chips not impact the Books?

Do the Suppliers wait until the vehicle is finished to Charge GM? Does the UAW wait on Wages until the Product is Salable?

No the costs keep coming in, just the revenue doesn't, and arguably "When they find a Home, or when Dealer's begin to pay Interest on them"

Even the Space to Park 90,000 vehicles impact profits. GM is a Master at not only Fudging Numbers, but playing the Poor Me/Wow I am #1 game, all depending on Which Handout they are after, or when they want to build Stock Prices.

 

[InCogKneeToe]

Yes, in some ways.
It's really a double edged sword. Sure, GM can't make the number of cars it wants to, so it's focusing on higher margin vehicles for now. But that has the potential of idling factories, limiting volume, reducing market share, allows competitors to potentially offer substitute product, etc.
Just remember, the chip shortage is largely pandemic induced. Supply and demand are still largely out of whack. And we're still in the middle of a pandemic, despite all signs to the contrary, so supply-side shocks may still be on the horizon.

The (Automotive) Chip Shortage is largely Auto Companies Fault, not Covid's. The Auto Company's "Just on Time" business way, when they Shut their plants down for Covid, calling all Suppliers saying "Halt Shipments" the Chip Manufacture's simply switched to more Profitable Newer Technology Chips for Cell Phone/ Computers, and such.

Think of it like Rental Cars. Do you think the Chip Manufacture's, want to build Low Content, Low Profit Chips, if they can run continuously making High Content High Profit chips, selling as many as they can produce?

 

[BlackGTP]

How can those awaiting Chips not impact the Books?

Do the Suppliers wait until the vehicle is finished to Charge GM? Does the UAW wait on Wages until the Product is Salable?

No the costs keep coming in, just the revenue doesn't, and arguably "When they find a Home, or when Dealer's begin to pay Interest on them"

Even the Space to Park 90,000 vehicles impact profits. GM is a Master at not only Fudging Numbers, but playing the Poor Me/Wow I am #1 game, all depending on Which Handout they are after, or when they want to build Stock Prices.

What you cited is cash flow, and as I said, those 90k vehicles impacted cash flow as the money went out. This impacts the books, just not the way you are thinking.

But, those 90k vehicles have zero impact on net income as produced vehicles sitting in a lot. These are considered inventory, inventory sits on the balance sheet until they are sold, once they are sold then the inventory is zero'd out (so the balance sheet is zero) then the revenue AND cost of the revenue (the inventory cost) are booked to the P&L - this is what gives you net income.

A simplified version of what goes on:

Build a vehicle (cost $100):
Debit Inventory $100 <=cost of the vehicle - this is a balance sheet account, no impact to the P&L/income
Credit Cash $(100) <=payments to suppliers - this is a balance sheet account, no impact to the P&L/income, but this is bad for the cash flow as it is money going out with none coming in

The vehicle sits in inventory until it is sold to a dealer.

Sell the vehicle for $110 which triggers the movement of the inventory to get moved to the P&L to match the revenue
Debit Cash $110 <=balance sheet - cash coming in
Credit Sales (Revenue) $(110) <=P&L
Debit Cost of Goods Sold $100 <=P&L
Credit Inventory $100 <=balance sheet - this zero's out your inventory
The above difference between the $110 credit to sales and the $100 debit to cost of goods sold gives you your revenue of $10

And yes, there is a cost to holding those vehicles, but probably not huge in the scheme of things, especially if they are parked on GM owned property - then that costs them nothing but the labor to get those vehicles parked and ultimately the cost to install the missing parts, which certainly costs more than doing it in the factory.

The question is, why might GM want to do this? A couple of thoughts - managing the efficiency of production runs - might be more efficient to produce those vehicles now, while the line is up and running vs. shutting it down and turn it back on to produce those vehicles. Another thought, once those missing parts come in they can get those vehicles to market pretty quickly vs. waiting to build an entire vehicle and hoping you can get all of the other parts that were possibly available a month earlier. Also, maybe they want to clear out the warehouses of those parts they do have - better to produce the vehicle vs. having the parts sitting in the warehouse, which has costs as well. Guessing, might be other ideas.

I don't think 90k vehicles is a massive deal, but needs to be watched closely that it doesn't grow to big.

 

[mgescuro]

The (Automotive) Chip Shortage is largely Auto Companies Fault, not Covid's. The Auto Company's "Just on Time" business way, when they Shut their plants down for Covid, calling all Suppliers saying "Halt Shipments" the Chip Manufacture's simply switched to more Profitable Newer Technology Chips for Cell Phone/ Computers, and such.

Think of it like Rental Cars. Do you think the Chip Manufacture's, want to build Low Content, Low Profit Chips, if they can run continuously making High Content High Profit chips, selling as many as they can produce?

HUH? You argue it's the auto companies' fault... and then you go right ahead and say it's covid.
If you think the auto industry is the only one affected by chip shortages, you're mistaken. They're just most impacted by it.
You've got a pretty simplistic interpretation of what's really happening.

The auto industry is slow to change, using old technology in their cars. This is fundamental, structural problem in the industry. The auto industry is changing quickly, with a major pivot towards EV. These new vehicles require even more chips, causing further strain on the already stretched industry. The pandemic was the catalyst.

There were delays with suppliers in Japan. South Korean companies that provided downstream operations (packaging, testing, etc) were severely impacted by the delta variant.

Simply blaming the JIT production system doesn't quite fly, since that really just mitigates carrying inventory. What it shows is that most company's JIT production systems didn't have redundant suppliers to mitigate any supply shocks. Toyota, which arguably invented and perfected the system, managed to go thru the shortage for far longer than anyone else.

 

[CJH]

Toyota, which arguably invented and perfected the system, managed to go thru the shortage for far longer than anyone else.

They had stockpiled chips after the Tsunami a few years back. So in essence they were hybrid JIT, stock pile semiconductors, but JIT everything else. Unfortunately, even they eventually ran out.

Pretty ugly out there still......

 

[mgescuro]

They had stockpiled chips after the Tsunami a few years back. So in essence they were hybrid JIT, stock pile semiconductors, but JIT everything else. Unfortunately, even they eventually ran out.

Pretty ugly out there still......

Yes. They adjusted their system to take into account supply shocks.
They most likely ran an analysis on the most optimal inventory to maintain on-hand in order maintain production levels for X period of time.

It's part of every advanced Operations Management course. It's also a complex calculation.

 

[InCogKneeToe]

HUH? You argue it's the auto companies' fault... and then you go right ahead and say it's covid.
If you think the auto industry is the only one affected by chip shortages, you're mistaken. They're just most impacted by it.
You've got a pretty simplistic interpretation of what's really happening.

The auto industry is slow to change, using old technology in their cars. This is fundamental, structural problem in the industry. The auto industry is changing quickly, with a major pivot towards EV. These new vehicles require even more chips, causing further strain on the already stretched industry. The pandemic was the catalyst.

There were delays with suppliers in Japan. South Korean companies that provided downstream operations (packaging, testing, etc) were severely impacted by the delta variant.

Simply blaming the JIT production system doesn't quite fly, since that really just mitigates carrying inventory. What it shows is that most company's JIT production systems didn't have redundant suppliers to mitigate any supply shocks. Toyota, which arguably invented and perfected the system, managed to go thru the shortage for far longer than anyone else.

Ok "Covid Related" but more so "Right on Time" Manufacturing.

"Covid Related" Deaths also include the Accident Victim, who couldn't be saved due to the lack of respirators @ the Hospital.

Other than the Short Chip Stopage caused by the Fire in Taiwan, I would guess that there was less than 2% fewer Micro Chips produced World Wide in 2020 overall. Just Demand and Price dictated where they went.

For one, I do know that the Local OSB Mill worked Non Stop Full Overtime during the Pandemic, and yet OSB prices @ local Lumber Yards Tripled or Quadrupled. Prices here hit $88/sheet, I have seen then as low as $7/sheet not long ago.