GM Stands to Report Big Profits Despite Chip Shortage

Detroit, MI, USA – July 31, 2014: People exit the General Motors World Headquarters building located in Detroit, Michigan.
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General Motors has a unique strategy for maneuvering around the global chip shortage. GM said it is directing limited supply of semiconductors for use in the production of its most profitable vehicle types, and redistributing inventory among dealerships, the Financial Times reports.

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This effort has contributed to allow GM to be able to promise earnings up to $11 billion this year, during a time where the auto industry is struggling because of the global chip problem.

The same forces behind toilet paper shortages last year also caused a blockage in the production of the microchips that power everything from our cell phone to your refrigerator. During the pandemic, demand for microchips sunk along with consumer spending amidst the early days of the pandemic. Then, suddenly, demand for chip-reliant gadgets like cell-phones, new home appliances and electronic upgrades surged. The supply-chain was already strained from pandemic restrictions and now inundated with orders it could not fill fast enough, thus leading to a global chip “crisis.”

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The automotive industry, in particular, was hit hard. Yahoo Finance reported in April that 4.7% of industry GDP is spent on microchips and related semiconductors. They added that auto companies typically do not hold on to large supplies of these products in order to keep costs down. With the anticipation of reduced consumer spending during the pandemic, they kept even less on hand.

Consumer interest “rebounded faster than the automakers had predicted. And by Q4 of 20202, they were outpacing Q4 2019 sales numbers. At the same time factories remained idling due to coronavirus restrictions, putting automakers even further behind,” Yahoo Finance added.

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GM is delivering more popular vehicles at a particular location and has “launched tools so dealers can see which products are heading to them, allowing them to sell the vehicles before they arrive,” FT added. The increased communication and efficiency has aided GM to keep sales up at a time where supply-chain restrictions had the potential to contribute to more losses than earnings.

General Motors’ execution speaks to the possible evolution of auto production in the future. More efficient and targeted communication with dealers could mean overall less production of vehicles necessary and a tighter understanding of who their customers are — and who is buying what where.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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