Published Date: 2021-10-11 | Source: INCE|Community | Author: The Finance Ghost
In the past week, a focus point of media headlines was third-quarter sales by automotive manufacturers.
The computer chip shortage has been a major driver of markets this year. Cars cannot be produced these days without computer chips, as they are required for various electronics in new vehicles. Similarly, we've seen major supply disruptions in computer hardware (like laptops) with a knock-on effect in hardware distributors.
The supply problems are being offset in various industries by substantial inflation, with price increases often being passed on to consumers. As the various economic forces come into play, like supply and demand equilibrium, this situation can change. Manufacturers with strong pricing power (the ability to pass costs on) do well in times of higher inflation, while those who produce commoditised products often see their margins shrink.
In the automotive industry, the supply constraints are driving fascinating (and sometimes frightening) results.
For example, General Motors (GM) reported a whopping 33% decrease in vehicle unit sales in the US in the third quarter. The company has blamed the chip shortages as well as historically low inventories that could not absorb higher levels of demand.
On top of the chip issue, there were supply chain disruptions in Malaysia that impacted GM. These international manufacturers have complicated supply chains and dependencies that have not withstood the impact of Covid.
It's not just the car companies, either. Nike has really struggled with the effect of Covid on its manufacturing base in countries like Vietnam.
On the plus side, GM highlights that demand for its products remains strong, which gives confirmation that the supply chain is the major issue.
Credit where credit is due: Tesla seems to be navigating the chip crisis far more effectively than GM. Musk's company reported unit growth in the third quarter of 71% year-on-year and 20% vs. the previous quarter.
There's perhaps an argument that it is easier to be a smaller manufacturer at a time like this. Tesla delivered 241,300 vehicles globally in the third quarter, around half of what GM delivered in the US alone.
Tesla did put some contingency plans in place though, announcing last quarter that alternative chips were being sourced and firmware changed to accommodate more flexibility in chips. This is most likely a case of an agile business performing better in times of crisis than a behemoth like GM.
Tesla will release its results on 20 October, at which time the impact on profits of strong sales growth will be disclosed. There's some positive momentum in the share price again, closing at $785.49 on Friday, up 6.7% in the past month.
Year-to-date, Tesla is only up 7.6%. It's had an exceptionally volatile share price on that journey, testing the key support level around $560 a few times this year. I've been vocal in my belief that Tesla would not provide adequate risk-weighted shareholder returns in 2021, with a valuation completely divorced from the fundamentals of the company.
Thus far, I've been correct.