The world is in the midst of a major chip shortage. Thanks to supply chain issues and stockpiling in 2020, a variety of types of chips are in short supply. So far, we have seen Apple and Tesla come out and say that the shortage could affect their production numbers. Tesla’s chip woes have been known for a long time, Apple’s became public knowledge just this week, when the company said it might not hit iPhone sales targets because of the shortage.
By far the sector most affected is the auto industry. The chips in short supply are largely those used in cars, which are increasingly high-tech, internet-connected machines. In this article, I will look at one company whose business could be seriously impacted by the chip shortage.
Magna International (TSX:MG)(NYSE:MGA) is an auto parts company that manufactures parts for major car companies. It also does contract car manufacturing through a European subsidiary. Magna’s business has been struggling in recent years. It mostly works with North American car companies, whose sales numbers have been poor lately.
Over the last three years, Magna has delivered negative growth in both revenue and net income. EPS is up slightly due to buybacks. That has been a saving grace for shareholders but hasn’t helped the business itself. 2021 earnings have been pretty good, but not enough to offset the three-year trend.
Recently, Magna stock got a bit of a boost when it announced that it was forming an electric car partnership with LG. The deal would see MG and LG work together in manufacturing electric car parts. MG stock rallied on the news, but it has given up much of the gains since then.
Why it could get hit hard
The reason why MG could get hit hard by the chip shortage is simple:
Its clients are already being hit hard. North American car companies are currently being walloped by the chip shortage. As mentioned, Tesla has already reported possible supply chain disruptions. The traditional carmakers have made similar reports. If America’s big car companies aren’t moving cars, then Magna will have nobody to sell car parts to. That could result in lower revenue and ultimately lower profits.
One reason for optimism
While Magna is facing short-term pressure due to the chip shortage, there is one reason for long-term optimism:
With the LG partnership going full steam ahead, there is reason to believe that MG will be a leader in electric car powertrain systems.
Magna is already an expert in electric powertrain systems. Partnering with LG gives it access to expertise in e-Motors and inverters, as well as access to Asian markets. It’s hard to say right now how the partnership is going, but we know that the joint venture has opened three new offices this year alone. So, there is some tentative cause for optimism.