Automotive Sector: Supply Chain Issues Stabilizing

Posted on June 9, 2023June 30, 2026 by io-fund

Please note: we plan to release a June stock tip later this month, as we are in a holding pattern with our portfolio until we see how a few key technical indicators are resolved, likely week of June 15th. As a reminder, we are a real portfolio and we do not publish stock tips or trades that we don’t plan to pursue ourselves in real-time.

Supply chain issues have been a well-publicized event that has been hard to predict. While there have been improvements in supply chain management since the production halts enforced during the pandemic, semiconductors continue to be a bottleneck in numerous industries, especially automotive.

The semiconductor bottleneck has had a ripple effect and has impacted industries outside of automotive production, such as ad-tech. In fact, ad-tech has been one of the most beaten-down industries due to the supply chain crisis. This is because automotive is a significant category of ad spend, and without inventory to sell, advertising budgets were slashed.

Domestic auto inventories declined to a record low in February 2022 and appear to have bottomed out in 2022. Supply chain issues are stabilizing, while the supply of raw materials and logistics are also expected to improve.

Supply Chain Management

The pandemic began in early 2020 and resulted in a whipsaw effect that impacted both supply and demand. With governments enforcing strict shelter in place orders, production of goods declined in 2020 but consumers still demanded goods. Government stimulus further bolstered demand and there was less of a contraction in total demand than there otherwise would have been. This dynamic led to the supply shortage that many sectors have been working through.

Since inventories are essentially the difference between production and sales over a period of time, the dynamic of reduced production but increased demand led to a sharp reduction in inventories in 2020 and 2021.

Chart 1. 50-year Trend of Changes in Private Inventories

Source: U.S. Bureau of Economic Analysis

As shown below in Chart 2, changes in private inventories, which is a measure of the value of the physical volume of inventories that businesses maintain to support their production, materially declined in Q2 2020. In fact, the $300 billion drawdown in inventories in Q2 2020 was the steepest drawdown in history.

However, while Q2 2020 represented the steepest decline on record, Q4 2021 represented the largest increase on record, as inventory levels bounced back by over $200 billion. However, with the increasing macro uncertainty, businesses have been liquidating inventories, leading to a drop in inventory levels in 2023.

Chart 2. Five-year Trend of Change in Private Inventories

Source: U.S. Bureau of Economic Analysis

In Chart 3 (below), inventories are also rising relative to sales, suggesting that there has been a build in inventory levels. Furthermore, the metric is above the five-year average, implying that inventories are not low on a systemic scale. However, it has been on a downward trend since Q2 2022.

Chart 3. Five-year Trend of Private Inventories to Final Sales of Domestic Business

Source: U.S. Bureau of Economic Analysis

Chart 4. Domestic Auto Inventories

Source: U.S. Bureau of Economic Analysis

The above chart from the U.S. Bureau of Economic Analysis shows that domestic auto inventories that had declined to a record low have bottomed in 2022.

Chart 5. Auto Inventory to Sales Ratio

Source: U.S. Bureau of Economic Analysis

Curiously, despite the fact that auto inventories are at record lows, automobile manufacturers’ total inventories are high. As shown below in Chart 6, total inventory levels in the automotive manufacturing industry have seen a sharp surge in 2021.

Chart 6. Automotive Total Inventories

Source: U.S. Census Bureau

These disparate trends are driven by the well-publicized semiconductor bottleneck. As Chart 6 highlights above, automotive manufacturers have large amounts of nearly completed inventory that remained idle due to the semiconductor supply. While there has been a stabilization in the supply chain issues, manufacturers are often faced with a situation where they are successful in obtaining one type of material and unable to find another. This was echoed by RJ Scaringe, CEO and Founder of Rivian Automotive, in the Q3 2022 earnings call, “But with a vehicle that has hundreds of suppliers and thousands of components coming from suppliers, it only takes 1 part from 1 supplier to stop the line. And as Claire referenced earlier, we had 5 days we lost already this quarter because of a single component supply shortage.”

"For sectors where demand is still strong, we are still seeing issues of materials shortages, and these problems will take additional time to resolve," said Jason Miller, associate professor of logistics at Michigan State University's Business School.

Management comments on the Supply Chain Stabilization

Arno Antlitz, CFO of Volkswagen, said in the Q4 2022 earnings call, “We expect that in 2023, the structural shortage of semiconductors will improve and the supply with raw materials and logistics will gradually stabilize. The latter one is within our clear focus.” He further updated in the recent Q1 2023 earnings call, “The supply situation is easing slowly, but continuously. We still experience disruptions, mainly in global logistics hindering us to deliver our vehicles to customers worldwide. Restrictions in vehicle delivery are also the reason for slightly higher inventory of finished goods.”

General Motors mentioned that the supply chain issues are improving. GM CFO Paul Jacobson said in the Q4 2022 earnings call, “We continue to face some supply chain and logistics issues, but overall things remain trending in the right direction.” He further updated in the recent Q1 2023 earnings call, “As we mentioned on the last earnings call, our plan is to balance supply with demand, and that's exactly what we did this quarter. Early in the year, production improved as supply constraints started to ease and began to outpace proactively plan some downtime, which allowed us to end the quarter with U.S. dealer stock flat compared to December, while we gained 1.3 points of share and increased volumes 4% year-over-year.”

John Lawler, CFO of Ford, mentioned the improving supply chain while providing the outlook for EBIT. He said in the recent earnings call, “And tailwinds driven by improvement in the supply chain.”

Richard Palmer, CFO of Stellantis, the company that was formed by the merger of Fiat Chrysler and the French PSA Group, also echoed the stabilization of supply chain issues. He said, “We continue to gradually reduce the level of production losses related to semiconductor shortages, and we expect supply to continue normalizing as we progress through the rest of the year.” He further said, “After the last two years of supply constrained environment marked by the pandemic, unfulfilled semiconductor orders and production disruptions, our inventory has now returned to a more normal level consistent with the current sales rate.”

EVs versus ICE:

According to some management teams, EVs will fare better if there is a pricing war between EVs and internal combustion engines (ICE).

Once the semi bottleneck improves and inventories increase, auto pricing will start to decline.

The hard part is to separate that inventory between internal combustion engine (ICE) and EV. i.e., ICE may grow but EVs may stay steady or not increase as much. Another data point related to inventories is SAAR (Auto Sales Seasonally Adjusted Sales Rate). This is what ON said in Q322:

Question

“the supply-demand balance on the automotive side. There is a concern that automotive could be kind of this next show to drop in this rolling correction in semis. What are you hearing from your auto customers about? Are they building inventory right now? What is the supply-demand balance when you look at OEMs and Tier 1s, especially towards the first half of next year?

Hassane El-Khoury

“If you look at the demand environment and where our growth and our demand is coming from, it's coming from EVs. No matter what report you look at or what customer you talk to an OEM, pure-play EV OEM or a broad OEM, there's one thing consistent. No matter what the SAAR does, they will build more EVs next year than they do this year. That's where our growth is coming from, both power and then more and more safety is getting into cars. That's where our sensing comes in. Between those two megatrends, our content is going to grow and remain growing even through '23, no matter what the SAAR does in this case, based on a lot of the prediction. So that's what gives us the confidence. Again, we have secured that outlook with LTSAs. So I'm not worried about that part of it.

Is ICE engine going to have some softness because of rates going up or demand going down? Potentially. But again, the EV plants are the ones that we focus on the ones that our OEMs want to make sure they secure their EV penetration or they're going to lose share. So that's what we work on. But it is not because of any inventory. If anything, it's potentially just demand. But at this point, we don't see it for our business given our exposure to EV.”

If the macro worsens and inventories increase, there will likely be a pricing war in ICE vehicles. First, because they need to sell them but also they likely need the cashflow to fund their EV programs. This may be positive for adtech because OEMs may have to advertise the discounts and EV programs.

Conclusion:

It has been some time that inventories in auto were back to normal, although it appears we may be approaching peak pricing. When inventories return to normal, this will be a much-needed tailwind to ad-tech. We also believe EVs are stronger in this regard due to comments that industry leaders have made, which is essentially that there will be more EVs produced every year regardless if overall auto sales decline.

Recommended Readings:

Leave a Reply Cancel reply