Chip shortage hits GM, drives third quarter profits down 40%

Chip shortage hits GM, drives third quarter profits down 40%

General Motors reported Wednesday that its third-quarter net income plummeted 40% as it struggled against production constraints and thin new car inventory.

The auto industry has faced a global shortage of semiconductor chips since February. The chips are used in many car parts and, without them, production at many GM plants has either slowed or stopped completely, leaving dealers’ new car lots bare.

The automaker reported a net income of $2.4 billion, down from $4 billion in the year ago period. Its adjusted earnings before interest and taxes (EBIT) was $3 billion, down from $5.3 billion. Revenue sank 25% to $26.8 billion compared to the year ago quarter when it was $35.5 billion.

In a letter to shareholders Wednesday, GM CEO Mary Barra assured Wall Street that GM is positioned well for the future with its strategy to introduce 30 new electric vehicles by 2025 and a promise to double revenues in the next decade with EVs and other diversification the company outlined earlier this month.

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Chip shortage hits GM, drives third quarter profits down 40%

But she acknowledged the struggles GM faced this quarter. 

“The quarter was challenging due to continuing semiconductor pressures,” Barra wrote. “But it also includes very strong results from GM Financial, the recall cost settlement we reached with our valued and respected supplier and JV partner LG Electronics, and ($300 million) in equity income from our joint ventures in China.” 

Barra ended by saying GM is tweaking its estimate for its full-year results, saying it will approach the high end of GM’s earlier guidance, “which is for EBIT-adjusted in the range of $11.5 billion to $13.5 billion, well above the $10 billion to $11 billion outlook we shared in February.”

Warning signs

GM’s results shouldn’t be a surprise to Wall Street, after all the warning signs were  there.

“GM made it through the early part of the year relatively unscathed, keeping its all-important pickup truck and SUV factories running by allocating computer chips to those more popular and more profitable models instead of installing them into less popular, less profitable and more abundant models, mostly cars,” said Michelle Krebs, executive analyst at Cox Automotive.

But by the third quarter, the chip shortage caught up to GM, forcing it to drastically cut production of all models across the board, Krebs said.

In September, GM warned Wall Street that the third quarter would be challenging because of the chips deficit. GM’s CFO Paul Jacobson said, at the time, the automaker’s second-half vehicle sales and production would be down 200,000 units compared with the first half, largely in the third quarter. GM delivered 1.1 million vehicles in the first half.

Then on Oct. 1, GM reported its new vehicle sales in the U.S. plummeted 33% from the year-ago period. It sold 446,997 vehicles in the U.S. compared with 665,192 a year ago. The U.S. accounts for the bulk of

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