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Treasurers fight working capital hit from semiconductor shortage


Hit by a global shortage of computer chips, carmakers such as Ford are using treasury skills to mitigate inventory squeezes

by Anmol Karwal

Published: 14 September 2021

The shift to electric vehicles has increased global demand for semiconductor chips which play an increasingly important role in the operations of a car. The problem: chips are in short supply and companies aren’t expecting the pain to be over soon. As they wait for longer-term shifts in manufacturing and procurement to kick in, treasurers have limited tools to deal with the problem.

The Conundrum

The impact of scarcity is visible on the working capital of automobile manufacturers including Ford, General Motors, BMW, Volkswagen, Daimler and Tesla as they are holding inventory of $129.5 billion at the end of the second quarter of 2021, $13 billion higher than the start of the year, increasing the demand for working capital as cash gets trapped in unfinished vehicles.

The US automobile major, Ford was particularly hit hard this year by the chip shortage exacerbated in March after a factory of its key supplier, Renesas Electronics caught fire resulting in a month to restart operations. This led to its Days Inventory Outstanding (DIO), a measure of the average number of days that a company holds inventory for before turning it into sales, skyrocket to 52 days in Q2 as compared to only 34 days in 2020.

The company took 11 additional days to convert cash as CCC reduced from -20 days in 2020 to -9 at the end of Q2.

The impact on Ford’s American competitor, General Motors was not as severe as its DIO rose by only 10%, or 4 days to 42 in Q2 as compared to Ford’s 50%. However, the company announced on 10th September that the shortage of chips will result in a production cut of 200,000 vehicles in the second half of the year, double the units it expected during the Q2 earning call.

“This semiconductor shortage remains fluid and the supply chain challenges continue in the second half of the year.” said Paul Jacobson, CFO at GM

While on the other hand, working capital of key Germany based automakers including BMW, Volkswagen(VW) and Daimler remained largely unscathed – although differing accounting rules may have played a part.

VW and BMW saw their DIO dip by 14 days, or 15% and 7 days, or 9% respectively at the end of Q2, back to their pre-pandemic levels. The ability to convert inventory faster into sales helped the companies further reduce their cash conversion by 13 days, or 16% and 5 days, or 13% respectively during the same period.

“We have been able to make up for the challenges in semiconductor supplies. But as the supply bottlenecks drag on, the situation is becoming more volatile. We anticipate further disruption to production in the second half of the year” said Nicolas Peter, CFO at BMW

VW’s CEO Herbet Diess was also cautious about the situation in the coming quarters,
“Semiconductor supply shortages, we managed quite successfully in the first half-year. But we see now the first real impact in our production” Diess said during the Q2 earnings call.

Meanwhile, Stuttgart-based producers of Mercedes vehicles, Daimler took 90 days to convert inventory slightly lower than 93 days at the start of the year.

It is important to note that these companies report inventory on their balance sheet using IFRS accounting standard as compared to US GAAP used by GM and Ford.

Revamping Supply chains

Auto companies are now scrambling to invest in their own chip manufacturing capacity, similar to tech giants which have been the largest users of semiconductors in the past.

According to a treasurer at a global carmaker, “the long term solution to the squeeze requires a shift to insourcing and vertical integration, following the lead of Tesla. This involves procurement and technology teams rather than treasurers” the source told EuroFinance. But he added that this process could take up to a decade to be completed.

In the meantime, treasurers are helping to alleviate the problem. For example, Ford says it aims to place greater emphasis on a ‘build-to-order sales bank’, helping it to operate on fewer vehicles on lots thereby reducing inventory levels going forward.

Treasury teams are also extensively scanning for stumbling blocks within the supply chain and stockpiling critical parts for production to alleviate risks. Ford expects its working capital requirements to reduce dramatically in the coming years as a result.

Giving a peak into its working capital initiatives during the Q2 earnings call, VW is also focusing on receivables, payables and stock calculation. The company will provide a detailed explanation of its efforts in the next quarter.

At the same time, low inventory levels of ready-to-deliver vehicles amid resilient consumer demand have led to record-high pricing helping automakers protect their bottom line in the short term.

Tesla’s early move

An outlier in the pack has been the electric car manufacturer, Tesla. Given the more software-driven approach of the vehicles produced by the company, one would expect its working capital to have a significant impact due to its higher demand for chips.

However, at the end of Q2, Tesla’s DIO declined by 20% to only 55 days, lowest in the last five years. This has helped the company move in a negative cash conversion territory, which means it is able to collect cash even before the vehicle is delivered to customers.

Tesla’s ability to take matters into its own hands by writing a new firmware and swapping in for alternative chips have helped it to overcome working capital issues. At the same time, the company has decided to pay in advance to secure the supply for chips.