The Big Chip Shortage

The Big Chip Shortage

Tesla shares took another hit after it was reported that production of the Model 3 at its Fremont facility was temporarily suspended. Before the rumor mill gained traction, Tesla CEO, Elon Musk clarified on Twitter that there is a shortage of parts, but the factory was able to reopen on Wednesday, “Fremont shut down for two days (parts shortages) & restarted yesterday.”

Inside sources revealed that with the supply issue in parts, the Tesla boss took it as an opportunity to do some maintenance on the assembly lines. Additionally, it was also said that workers on the Model 3 production line in Fremont were told their line would be down from Feb. 22 until March 7, though some Model 3 employees were back in the factory Feb. 24.

Apparently, these workers were told they would be paid for Feb. 22 and Feb. 23 and not paid for Feb. 28, March 1, 2 and 3. They were advised to take vacation time, if they had it. None of the information could be verified though.

But Musk has since emailed his employees informing them that production would be ramped up over the next few days of the more expensive Model S and Model X lines, which would soon go back to two shifts.

It seems that Tesla predicted the parts supply issue as last month it hinted at the possibility of being impacted by the global semiconductor shortage and logistics disruptions because of backlog issues at ports and severe weather affecting ground transport.

Chief Finance Officer Zach Kirkhorn said on an earnings call last month the company is working to manage the disruptions, saying they “may have a temporary impact.”

So, it’s more of an industry-wide problem issue and not exclusively a Tesla problem, which is a stark reminder that the EV manufacturing space is vulnerable to disruptions in the supply chain.

Samsung Electronics supplies the chips to Tesla that control self-driving capabilities to Tesla, and last week it had to suspend production at its factory in Austin, Texas due to the massive winter storm that caused statewide power outages.

Tesla will need to brace for loss revenue from the production disruption and it will no doubt impact its production volumes. While production outages aren’t rare for car manufacturers, they do cost the companies a lot of revenue.

It also had a knock-on effect with the shares, however Dan Ives, a Wedbush Securities analyst with a neutral rating on Tesla’s stock said, “We are not overly concerned this supply chain/factory disruption changes the overall delivery trajectory for 1Q and 2021”.

Tesla shares pared a drop of as much as 6.3% to trade down 5.2% to $703.52.

The Fremont plant is still a key part of Tesla’s vehicle-production base with estimated production volumes to be around 600,000 vehicles a year.

It wasn’t just Tesla that felt the impact. Other automakers, including VW, General Motors, and Ford were also forced to scale down on production.

General Motors had to extend its temporary shutdowns at three assembly plants. The factories that were impacted vehicles in Kansas, Ontario, Canada and San Luis Potosí, Mexico.

Ford Motors was also forced to stop production of its highly profitable F-150 pickup trucks due to the chip shortage. The automaker said it was not able to prioritize production of the pickups because they use unique chips compared with other models. The shortage is expected to affect Ford’s by $1 billion to $2.5 billion this year.

Volkswagen also filed for reduced working hours at its sites in Kassel and Brunswick in February as a precautionary measure. Volkswagen said, “That means that, depending on the supply situation, there can be adjustments in vehicle and components production over the coming weeks.” Volkswagen said.

While global automakers are having to adjust assembly lines and production schedules due to semiconductor shortages, the issue has also turned with political after German Economy Minister Peter Altmaier wrote to his Taiwanese counterpart to ask for help in addressing it.