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Transmission: Chip shortage threatens post-pandemic recovery

Happy Friday! Here’s what’s cookin’ today in Transmission:

  • Semiconductor shortage threatens post-pandemic economic recovery
  • Infrastructure projects in Mexico and USMCA open up the door for investment in US-Mexico border region
  • Industry news

Semiconductor shortage threatens post-pandemic economic recovery

The global chip shortage has been running rampant for more than three months now. Automakers have been trimming production in recent weeks in hopes that supply catches up with demand relatively quickly. Last week, Taiwan Semiconductor Manufacturing Co. (TSMC) announced that it would prioritize auto chip production in response to the shortage. And U.S. senators urged President Biden this week to work with Congress to address this threatening problem. 

In a letter addressed to the White House, senators from important auto states, including Michigan, Ohio and Tennessee, warned the administration that the semiconductor shortage “threatens post-pandemic economic recovery.” The letter also urged the president “to support efforts to secure the necessary funding to swiftly implement the semiconductor-related provisions in the most recent National Defense Authorization Act, which would boost the production of semiconductor manufacturing and incent the domestic production of semiconductors in the future.”

A tale of two automakers: General Motors (NYSE: GM) has now become the largest OEM affected by the shortage. GM will now halt production entirely next week at three of the automaker’s assembly plants located in Fairfax, Kansas; Ingersoll, Ontario, Canada; and San Luis Potosi, Mexico. GM’s plant in Korea will cut production output in half as well. 

AutoForecast Solutions, which analyzes auto production, estimated GM would lose almost 10,000 vehicles in lost volume. Through the entire shortage, GM’s focus has shifted to prioritizing production of vehicles with the highest profit margins while it mitigates the negative impacts of low supply. Unlike GM, Ford (NYSE: F) cut production of the nation’s top-selling pickup and Ford’s most profitable vehicle: the F-150. The automaker is dropping one shift from its truck plants located in Dearborn, Michigan, and Kansas City, Missouri, with both sites expected to resume full production starting on Feb. 15. Ford’s headache caused by the shortage has now grown into a migraine as deliveries of the redesigned F-150 dropped 5% in January. 

(Chart: Freightwaves SONAR. Movement of motor vehicles and parts carloads (2021-Blue; 2020-Green; 2019-Orange))

We know that OEMs have reduced assembly plant production. So far the shortage hasn’t had any detrimental effects on the movement of finished vehicles; however, production cuts have caused a small dip in the amount of vehicles leaving the assembly plant via rail. As of Jan. 23, movement of motor vehicles and parts via rail was down nearly 5% from this time in 2020. 

Auto supplier Bosch shared on Thursday that the industry’s growth will be constrained as a consequence of the semiconductor shortage. In 2020, 78 million vehicles were produced, down from 92 million in 2019. Bosch estimates that about 85 million vehicles will be produced this year and that the global economy will rise 4% after dropping 4.5% in 2020. When the industry shut down last spring, we saw a strong recovery throughout the rest of the year as automakers sought to make up lost ground. Likewise, once this shortage is sorted out, the industry will need to pop production into overdrive if there’s any chance of hitting 2019 production levels.

What started as a minor shortage that wouldn’t have a dire impact on the auto industry has now evolved into a much larger problem. When Volkswagen ran into the issue in the beginning of December, industry experts predicted that shortage would run into Q1 before correcting. However, now IHS Markit is predicting chip disruptions could run into Q3 of this year.

Infrastructure projects in Mexico and USMCA open up the door for investment in US-Mexico border region 

Five infrastructure projects are set to begin this year, one of which is an international rail bridge built by Kansas City Southern (KCS). The bridge is waiting for final approval by Mexican authorities. Once approved, KCS has 15 years to build the railroad alongside its existing line outside of Laredo, Texas, although the rail operator hopes for an early completion date in order to serve demand generated from the United States-Mexico-Canada Agreement (USMCA). Among the list of the other projects are new highways and a new western border entry point. 

These infrastructure projects join a long list of exciting new investments underway in the border region, including a $1 billion warehouse and logistics port and a $27 million auto parts plant. They also open up a door for companies to relocate manufacturing within the region to take advantage of the opportunities the USMCA presents.

At an event last week, Chris Wilson, deputy director of Wilson Center’s Mexico Institute, discussed these new opportunities, saying, “I think the huge untapped opportunity — and we see examples of it starting to bubble up — is for real binational manufacturing inside the border region because in a small geographic area you can combine the comparative advantages of low-cost labor in Mexico, or really mid-cost, high-skilled labor in Mexico, with lower costs of capital in the United States, lower costs of energy in the United States and higher-skilled workers in the United States.” 

Wilson also pointed out that strong bipartisan support for the USMCA is unlike any other trade agreement the U.S. has ever passed. Strong approval from both parties in Washington points to the confidence and certainty of investors and the trade community. As more infrastructure projects are completed, freight volumes will grow to fill the new capacity: good news for shippers, carriers and brokers covering cross-border trade. 

Industry news:

  • This one hits close to home: The Tennessee Valley Authority (TVA) and Tennessee Department of Environment and Conservation (TDEC) teamed up to develop a statewide EV charging network. This initiative will add 50 charging locations, more than doubling the current charging infrastructure within the state. TDEC’s website does not give a completion date but does say the cost will be roughly $20 million.
  • Cummins Inc. (NYSE: CMI) had a successful Q4 thanks to demand in China. The company saw Q4 revenues hit $5.8 billion, an increase of 5% compared to the same quarter in 2019. Full-year revenues sat around $19.8 billion, a 16% decrease from 2019. Tom Linebarger, CEO of Cummins, shared in a recent press release that even though demand in 2021 is improving, the company is still walking with caution due to the uncertainty that the pandemic has created.
  • In September 2019, Amazon (NASDAQ: AMZN) announced that it would buy 100,000 electric delivery vans built by Rivian. The order came as a huge win for Rivian and cost roughly $4 billion. This week Amazon confirmed that Los Angeles has been a testing ground for the new EV fleet. Amazon plans to have 10,000 vans on the road by 2022 and all 100,000 vans in operation by 2030. Rivian also shared that 15 additional cities would see these electric vans in 2021.

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