Ford braces for $1bn hit from soaring supplier costs and parts shortages

Automotive manufacturer Ford is reducing product complexity and “streamlining operations” as it warns earnings will be affected by higher-than-expected supplier costs and parts shortages.

Ahead of third quarter results to be announced in October, Ford said suppliers have been hit by inflation and the company is paying more for parts and materials. Higher payments added about $1bn in unexpected costs, indicating supply chain issues and pressures still weigh on carmakers. 

Parts shortages have also resulted in between 40,000 and 45,000 unfinished vehicles in Ford's inventory at the end of the quarter it couldn’t sell. These vehicles are expected to be completed and sold in the fourth quarter, as they await parts in disproportionately high demand. 

A spokesperson for Ford told Supply Management the company was taking action to mitigate costs. “Broadly, we’re reducing complexity in product design, streamlining operations and working to improve quality/reduce warranty costs, among other actions. We have described and taken pricing actions – and will continue to do so, where necessary – to help offset commodity cost increases.

“Most suppliers are dealing with the same inflationary headwinds as Ford and other manufacturers,” they added.

The company stated last year it expected the semiconductor shortage to cause a $2.5bn hit to its 2021 earnings.

Chipmakers who supply the automotive industry are seeing a gradual easing of the shortage. Manufacturer Infineon Technologies told S&P Global risks of further supply chain disruptions remained but the demand-supply situation would stabilise as shortages eased. However, it cautioned the general economic slowdown and potential energy shortages could affect supplies.

S&P Global warned of weaker consumer demand, over-stockpiling by manufacturers and changes to US chip export policies. It projected chip shortages would prevent carmakers from meeting pent-up demand for the rest of 2022 and into 2023. Demand for chips could also be strained further, it suggested, as electric vehicle driver-assistance products are accelerated.

S&P found vehicle makers with China-dependent supply chains could hasten efforts to shift production elsewhere to minimise future disruptions, for example because of Covid lockdowns.

Data from automotive solutions provider AutoForecast Solutions (AFS) found 47,800 vehicles had been cut from global production schedules this week due to microchip shortages. According to AFS, the production of nearly 3.3m vehicles has been impacted so far this year due to a lack of semiconductors, including 1.4m being lost entirely.

Ford now expects its third quarter earnings to be in the range of $1.4bn-$1.7bn. Its full-year earnings projections remain unchanged at $11.5-$12.5bn. The company’s second quarter earnings this year were $3.7bn. 

During the company's second-quarter earnings reporting, executives said significant progress had been made on completing and shipping vehicles awaiting parts. The company ended the second quarter with inventory of around 18,000 vehicles waiting for parts, down from 53,000 at the start of the quarter.

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