Auto industry ‘really struggling’ due to chip shortage, analyst says

KPMG Global Automotive Sector Leader Gary Silberg joins Yahoo Finance to discuss the state of the auto industry, General Motors earnings, the impact of the chip shortage, and the outlook for technological innovation in cars.

Video Transcript

[MUSIC PLAYING]

- Well, General Motors is posting a steep drop in profit in the second quarter as the ongoing chip shortage continues to weigh on its supply chain. CEO Mary Barra emphasizing on the earnings call this morning the need for more chips to meet a healthy level of inventory. Take a listen.

MARY BARRA: If that even as-- or if, I should say-- if we get to a more normalized level that we don't have pent-up demand for full-sized trucks, SUVs, and midsize crossovers, we still have some work to do to get a healthy level of inventory, a very lean but healthy level of inventory. So that's what we're focused on. And frankly, we need more chips to do that. And as we move and continue to put more technology on vehicles, we need even more semiconductors.

- Well, KPMG is out with a report this morning that says the semiconductor industry is on track for double-digit growth this year, despite some of those supply challenges. Joining us now is KPMG global automotive sector leader Gary Silber. Gary, it's good to talk to you today. I feel like every day some company is warning about the chip shortage.

This has never been an issue about demand. The demand is clearly there. But the supply concerns continue to weigh on the sector. What do you see?

GARY SILBERG: Yeah. Absolutely, Akiko. I keep going I listen to Mary. She's got it right. And, unfortunately, I think there's more pain in the system for the next, you know six months and maybe even a year. So it's tough. And managing this, having the skills, the technology skills, the software skills, the industry is really struggling.

And you can see it in their numbers. And I think you see it in other numbers when you'll see the earnings results. We at KPMG-- and I think I was talking to you-- I think it was you-- back in late 2019, 2020. I don't want to brag that we were somewhat prescient. But when we first announced our paper, we'll talk about today, on the importance of the semiconductor industry, we walked through this issue. Little did we know we would have this supply.

We didn't obviously predict that. But we were incredibly bullish long term, just like Mary said, on this industry. It's going to be phenomenal going forward. But a lot of pain in the near term, unfortunately.

- Hey, Gary. It's Brian Cheung here. Well, it's fantastic, then, that we have back on the show again. So give us a projection of what you see going forward so that we can bring you back on again in a few years to make sure that you are right here. But look, at the end of the day, what's becoming clear is that it's not just the supply chain story.

The demand for these chips as cars get smarter is going to be just higher going forward. The amount of plants, the amount of companies out there enough to supply that over the next, say, 5 to 10 years.

GARY SILBERG: Spot on, Brian. And when we talked, I think, the last time about this in late 2019 or early 2020, I like to keep it simple. Three things. One, I call it the sexy electronics. So imagine, you know, we're in 2025, 2030, 2035, you walk up to your car, and it sees you, right? Face-- facial recognition.

Or you put your hand up on the car. And it recognizes your fingers. These are all chips and software that you're going to have to know that your car. You'll sit-in the chair, like I'm doing here. It will recognize your body. It will move the seat. Those are all chips.

You'll push the little button to start the vehicle, if you're even driving it. And that will take off. And you haven't even started driving. And think of all the computer chips that-- I call it the sexy fun stuff that you haven't even started the vehicle.

And, you know, going forward, I can tell you there will be a world-- and I'm talking with startups. Like, your windows going forward will be just data and information. You'll be able to perhaps even stream movies and-- let alone what we're doing today.

So it's quite a bullish outlook, at least in the three areas. We think the sexy electronics, safety, and even powertrain, I want to talk to you about. These are massive growth opportunities for the semiconductor industry and for automotive.

- Well, and it's worth noting. We've got a chart here that shows where the biggest growth driver expectations are. Cars have really moved up the ladder on that front, although wireless communications, phones, still number one. We've seen-- we're talking-- in a week where we're likely to see the CHIPS Act-- or CHIPS Plus, I guess, is what we're calling it-- move through the Senate.

You've also got aggressive incentives being introduced in places like Europe. I mean, clearly, people see the demand. They're all jumping in. But this is a multiyear story. How big of a risk is there for overcapacity on the other end?

GARY SILBERG: Great question, Akiko. So before that was announced, just in the United States today, you have Intel Corporation in the Chandler area, in the Phoenix land area. I think they're building four fabs. They have over, I think, $20 billion in investment going up, something like that.

You have TSMC, who's building now, I think, $12 billion worth of fabs in the Phoenix land area. Samsung has announced already building in the Austin land area of Texas. I don't know if that's $10 billion.

These are massive bets that are being placed right now. And like you said, Akiko, this is for the future. And with this act, you know, you're going to have more and more investment. So, yes, there will be demand. But we all understand when supply and demand get into this disequilibrium, especially with these billion-dollar bets, you could have unintended consequences. Let's just put it like that. And that could be what you just described, is overcapacity.

- Gary, I want to ask-- I mean, it's not just automotive. Obviously, wireless telecommunications with 5G coming online is very much a big part of this story as well. Is there a concern that, you know, given the supply issues that we've just talked about, that that might crowd out where the chips are going?

GARY SILBERG: Well, that's an interesting point. So the high tech, the 4 nanometer I guess they're at-- and they're going lower-- those typically go on your faster consumer electronic products. Automotive-- you know, you design a vehicle. It takes three years to really get to production. So you're-- you're sometimes not in the most cutting edge chip.

So there will be this delay in where these chips might go going forward. But if there is overcapacity, then you're going to see prices come down, is which we've historically seen. What I find fascinating also about the demand side of this is if you look at the safety and the amount of safety going on in the cars these days-- from ADAS, where the cameras around your car that can save your life. I was listening-- it was-- I don't know if you've heard the Tesla earnings call.

But their car-- they said on their call that their cars will be able to see-- they can see now. But they're able to anticipate accidents. And they're actually going to have your safety belt tighten up before you have an accident. I mean, the amount of cool safety-- I talked about the sexy electronics.

But the amount of cool safety things where the car drives you and can save your life, I just think the demand side-- we don't really understand how big this is. KPMG, we think, will be a $250 billion automotive market by 2040. But, you know, who knows? It could even be more. I don't know. It's

Just going to be a future that will be fantastic for the consumer. We'll see where the supply and demand end up.

- Gary, finally, we're coming off of several years where the trend in the sector has been to go fab-less. You mentioned a name like Intel. I mean, they are doubling down on manufacturing. TSMC is doing the same.

As we look ahead to the kind of demand you're anticipating, are all these chip makers-- the designers, especially-- are they going to have to go back to manufacturing to be able to meet this kind of demand? Is the pendulum swinging back?

- Well, I think as you get into the more technical-- you know, I'm a wannabe quantum physicist. So, I mean, these are hundred trillion operations that go back in a second. I mean, that's just mind blowing.

So having the skills to do that for the semiconductor players, I think that's something Intel thinks needs to be core to them. Nvidia, at the moment, doesn't-- and others and Qualcomm. It'll be interesting to play out. It will be interesting who takes what strategy going forward.

I'm more biased, just as I watch manufacturers like the Teslas of the world, where they vertically integrate and bring the core manufacturing to themselves is as an advantage. But these are billion-dollar bets. And I can completely understand why they don't want to do that at the same time also, Akiko.

- Yeah, big bets. Certainly. KPMG global auto sector leader Gary Silber, thank you so much for joining us. Really appreciate it.