Here are two car stocks to buy amid a global semiconductor chip shortage

Written by: Michael Harris
February 27, 2021
  • The auto industry is in a difficult position amid a global shortage of semiconductors
  • It appears that Hyundai and Toyota have managed to dodge the shortage of chips
  • Buyers of Hyundai stock are targeting 32800, which offers a premium of about 40% from the current levels
  • The long-term target for Toyota stock buyers is 10000, which is over 25% higher compared to the market price

Shares of Hyundai Motor Company (KRX: 005380) and Toyota Motor Corp (NYSE: TM) may prove to be a safe bet in 2021 as the wider car industry faces semiconductors supply constraints. 

Lack of semiconductor chips hampering car industry

The auto industry is in a difficult position as the global shortage of semiconductors is hampering the production and output levels. Early estimates are showing that the entire industry may lose over $60 billion due to slashed output levels. 

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For instance, Mazda announced it is contemplating cutting its global output by 34,000 vehicles over the next two months due to a chip shortage. Similarly, FCA was forced to shut down its assembly plant in Brampton, Ontario.

Given the US is a country that suffers the most from a current shortage of semiconductors, President Joe Biden signed an executive order this week to address the shortage of chips. Biden ordered a 100-day review of semiconductor supply chains, targeting four specific fields: EV batteries, semiconductor chips, rare earth minerals, and pharmaceuticals.

“Make no mistake, we’re not simply planning to order up reports. We are planning to take actions to close gaps as we identify them. We expect that by taking this kind of comprehensive approach to supply chain resilience…we will be able to strengthen our supply chains for the long term,” the administration official said.

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Hyundai and Toyota well-positioned

It appears that Hyundai and Toyota have managed to dodge the semiconductor chip crunch that has been troubling carmakers around the world. Hyundai has maintained its chip stockpile in 2020, while a wider chip deficit forced global carmakers including General Motors and Volkswagen to slash production, urging Germany and the United States to quickly address the issue. 

Only three global car manufacturers, including Japanese Toyota Motor, Hyundai, and its sister company Kia, have reportedly maintained a stockpile of semiconductors that allowed them to resume production. 

However, if the issue doesn’t get resolved soon, the crisis could affect Hyundai and Toyota as well, as low capacity starts to weigh on the production of high-tech car vehicle chips. Hyundai was continuously buying chips, while rivals were slashing orders as a result of pandemic-induced weak demand. 

The South Korean company has previously faced supply chain issues and was forced to pause production, urging the South Korean carmaker to take a more conservative approach when it comes to inventory, analysts said. 

“Like other automakers, Hyundai also planned to cut production at the beginning of the year because of COVID-19,” a Hyundai source told Reuters.

“But procurement read the trend of the semiconductor industry cutting auto chips production and said, ‘if we don’t buy them as well, we’ll be in trouble later on,’” they added, referring to tech companies that rushed to purchase chips and slashed the semiconductor making capacity. 

Semiconductor companies that supply carmakers outsource a large part of their production to Asia-based contract manufacturers, who usually give priority to electronics companies as they account for almost their entire revenue. 

Hyundai purchased fewer chips last year compared to 2019, though it significantly increased its purchases in the quarter ended December. 

The South Korean market coped with the effects of the pandemic quite well, which probably had an impact on Hyundai’s plans and its experiences with China and Japan, according to analysts. 

Back in 2019, Hyundai had a diplomatic dispute with Japan which had an impact on the chemicals supply  chain at South Korea-based chipmakers. The carmaker took a lesson then as well as last year after the coronavirus outbreak in China, which resulted in production halts at Hyundai’s and Kia’s plants.

Technical analysis: Levels to watch for Hyundai and Toyota

Hyundai stock price closed over 2% lower amid a wider selloff in global equities. Shares of the South Korean carmaker are trading about 3.5% higher in February after gaining nearly 20% in January. 

Hyundai monthly chart (TradingView)

The price action is struggling to get above 25000, a level that offers crucial resistance higher. Hyundai stock price traded above this level at some point earlier this month but the buyers have failed to close above this level. The long-term target on the upside is 32800, which offers a premium of about 40% compared to the current market price.

Toyota stock price is trading within a wedge. A bullish run that has taken place this month pushed the price action towards a resistance of the wedge to result in a five and a half year high for the stock. The long-term target for Toyota stock buyers is 10000, which is over 25% higher compared to the market price.

Toyota monthly chart (TradingView)

Summary

Hyundai and Toyota have reportedly managed to avoid the negative effects of semiconductor chip shortages thanks to the successful maintenance of its chip stockpile last year.