Mercedes earnings show that the car chip shortage hasn’t been all bad for automakers
The ongoing automotive semiconductor shortage one consultancy pithily called “chipaggedon” might actually prove to be a blessing in disguise for carmakers.
On Thursday, Germany’s Daimler followed mass market peers Ford, Volkswagen, and Stellantis in reporting better-than-expected second-quarter results, citing favorable product mix at its core Mercedes-Benz brand, strict cost management, and reduced credit risks from its loan book.
Following so swiftly on the heels of the pandemic, the semiconductor bottleneck initially appeared to be a one-two blow for the sector, but Jefferies auto analyst Philippe Houchois believes there may be a silver lining—assuming the situation doesn’t markedly deteriorate further.
Not only have manufacturers skewed their production toward more profitable models such as larger, fully equipped SUVs, the chip crunch may lead indirectly to a lasting benefit by weaning automakers off their addiction to move metal with the aid of margin-diluting rebates.
“Given how protracted the problem has been, the industry has been forced to adjust. Had it just been a flash shortage, this likely would not have been the case,” Houchois told Fortune.
What’s good news for automakers, however, is bad for car customers, who are now paying more at showrooms. This has been a contributing factor in the U.S. inflation rate increasing at its highest month-on-month pace since June 2008.
“As a result, consumers are now buying cars at list price rather than the 10% to 15% discounts we typically see. In the U.S., where the car market is already back to 2019 levels and inventories are much more depleted than in Europe, some dealers are even marking prices up,” he said, adding the next 12 to 18 months will indicate whether this discipline can be sustained.
Daimler said earnings before interest and tax at its Mercedes cars and vans division, which will soon form the core of a new stand-alone company, swung to €3.4 billion ($4.1 billion) in the second quarter. This easily exceeded consensus estimates the company collected of €2.9 billion and the €1.1 billion loss in the previous year’s quarter.
More importantly, the operating margin surged to 12.8% when adjusted for €166 million in nonrecurring legal and restructuring costs—significantly higher than the 11.5% the market expected.
In a statement, Daimler CEO Ola Källlenius attributed the third straight quarter of double-digit margins to a “relentless focus on profitable growth and tight cost control” at Mercedes.
The better-than-expected results mean there is anywhere between 10% to 15% upside to consensus estimates, investment bank UBS estimated.
It, too, saw indirect benefits from the supply shortage, writing in a research note: “We think an industrywide, tighter-for-longer chip supply situation bodes well for price/mix also in the next few quarters.”
Early warning system
According to automakers, there is also no reason to believe the bottleneck will end anytime soon. When Volkswagen prereleased record first-half operating profit of €11 billion, it said the chip shortage it first flagged in mid-December would now likely affect deliveries more in the second half than in the first, as dealers were able to rely on inventories.
BMW Group production chief Milan Nedeljković told reporters the current output gap at his company amounted to roughly 30,000 vehicles, as assembly lines across its factory network stood motionless during individual shifts or even entire days.
“The supply constraints of semiconductors is really critical, and the entire auto industry has been heavily affected by it,” he said at the start of this month.
BMW, Daimler, and Volkswagen are now currently developing an early warning system to prevent further shortages from occurring in the future and help gain a better overview over the vast network of small and medium-size companies that feed their direct suppliers.
“Manufacturers don’t actually have visibility into their supply chain,” said Anil Valsan, EY global automotive and transportation lead analyst, during a podcast earlier this month, dubbing the shortage as “chipaggedon.”
While the industry as a whole might benefit from the increased pricing discipline, market forecaster LMC Automotive warned at the end of last month that individual carmakers could suffer heavily if they cannot deliver to customers during the post-pandemic U.S. economic boom.
“What should not be underestimated is the cost of losing a (sometimes very loyal) customer, due to lack of inventory, or the effort it will take to win back those disappointed buyers,” it wrote.
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