Chip Shortage Affects Cummins
Count Cummins Inc. among the companies struggling to get enough semiconductors to complete customers’ orders.
Semiconductors are chips that power data centers, vehicles and digital devices. Demand was already high with the rollout of 5G devices before COVID-19 drove millions of people to use new technology to work and go to school. While most semiconductors are made in China, February’s winter storm in Texas forced Samsung and NXP to halt production at those companies’ domestic semiconductor facilities, further exacerbating the shortage.
The shortage is expected to last at least through the rest of the year, with some companies expecting the shortage to continue through 2022. Automakers Ford, Chevrolet, Cadillac, Hyundai, Jaguar, Mercedes-Benz, BMW, Mitsubishi, Nissan and Subaru are all limiting car production until microchip orders can be filled. Further complicating the problem is some companies are waiting on parts makers like Cummins to be able to secure enough semiconductors to provide the parts needed to finish building the company’s cars.
“And just to call it out directly, the big problem is semiconductors,” Tom Linebarger, Cummins CEO, said during a conference call with investor analysts earlier this week. “There is a lot of supply chain challenges. There is everything, weather in Texas and now new challenges with India. You name it, and we have a shortage on it, but semiconductors is the biggie. That’s the one that’s really hard to deal with. And in this quarter, we ended up buying chips on the market, through the aftermarket and bringing them back into production.”
President Joe Biden said in mid-April that he had bipartisan support for government funding to address the semiconductor shortage through a $50 billion semiconductor manufacturing and research proposal. The $50 billion proposal is part of the $2.25 trillion infrastructure plan the Biden administration is trying to shepherd through Congress, though many lawmakers support the semiconductor plan as a standalone bill rather than as part of a bigger package. An April meeting hosted by Brian Deese, National Economic Council director, and Jake Sullivan, National Security Adviser, included Gina Raimondo, U.S. commerce secretary, and officials from Dell Technologies Inc., Intel Corp., Medtronic Plc, Northrop Grumman Corp., HP Inc., Cummins Inc., Micron Technology Inc., Taiwan Semiconductor Manufacturing Co., AT&T Inc. and Samsung Electronics Co., as well as GM, Ford and Alphabet Inc.
The U.S. has only 12% of the world’s semiconductor factory capacity, down from 37% in 1990, according to the Semiconductor Industry Association.
Those discussions aren’t helping companies in the short-term, however, where the semiconductor shortage is having an impact on both Cummins’ ability to fill orders and on the company’s bottom line.
“We rescheduled and rescheduled and rescheduled to meet our customers’ demand,” Linebarger said. “Our customers, after a pretty tough first half of last year, are finally seeing demand go up and really want to ship trucks to their customers. And we really want to help them do that. So frankly, we took it on the chin. We basically brought in everything we could as fast as we could and shipped it out to them and didn’t raise prices or didn’t do any of those things. We just shipped them. And we took it, took it hard this quarter. And that’s just the honest truth. And it’s because we felt a commitment to those customers to get them the product best we could while the going was good.”