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Elon Musk Says Tesla's California Factory Was Forced to Close for Two Days Due to Parts Shortages

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【Summary】The global chip shortages that have been plaguing the auto industry this year has apparently hit electric automaker Tesla Inc., the world’s most valuable car company, according to sources that spoke to Reuters. The sources said they were not aware of a reason for the production cuts, but one person said the ongoing chip shortage affecting the auto industry is at least partially to blame.

FutureCar Staff    Feb 25, 2021 3:45 PM PT
Elon Musk Says Tesla's California Factory Was Forced to Close for Two Days Due to Parts Shortages
A robot installs seats in a Model 3 sedan at Tesla’s California factory. (Photo: Balazs Gardi, Bloomberg Businessweek)

The global chip shortages that have been plaguing the auto industry this year has apparently hit electric automaker Tesla Inc., the world's most valuable car company, sources say.

Tesla plans to slash production of its Model 3 sedans for two weeks, sources told Reuters on Thursday. The production cuts come as demand for the Model 3 has slowed, so Tesla is dealing with two separate issues which led to its decision to reduce output at its California factory.

The news of the Tesla shutting down Model 3 production was first reported by Bloomberg.

Tesla's factory in Fremont, California produces all of the vehicles sold in North America.

The sources that spoke to Reuters said they were not aware of a reason for the production cuts, but one person said the ongoing chip shortage affecting the auto industry is at least partially to blame. 

The reduction in output is expected to last until March 7.

Shares of Tesla fell 8% to $682.22 and the end of Thursday's trading session on the news of the shutdown.

In a tweet on Thursday, Tesla Chief Executive Officer Elon Musk announced that the company's Fremont plant was shut down for two days this week and reopened on Wednesday due to "parts shortages." Tesla said last month that it might face a temporary impact from a global semiconductor shortage and logistics disruptions at ports.

Tesla's Fremont factory employs over 10,000 workers.

Tesla is just the latest automaker to curb production in 2021. The global chip shortages have impacted most of the world's biggest automakers.

In mid January, Ford Motor Co, Subaru Corp and Toyota Motor Corp said they would curtail vehicle production in the United States. After the new year, Ford shut down its Louisville, Kentucky plant for one week due to the chip shortages. 

Ford's Louisville plant employs roughly 3,900 hourly workers and currently builds the popular Ford Escape SUV and luxury Lincoln Corsair.

"The global semiconductor shortage is presenting challenges and production disruptions for the global auto industry, including Ford, which could have a significant knock-on effect on jobs and the economy given the importance of auto manufacturing," Ford Motor Co said in a statement at the time.

Earlier this month, U.S. automaker General Motors said the production cuts at its plants would extend through the middle of next month at three locations. In addition, GM said the vehicles GM produces at two other plants will only be "partially built" until the chips are available to finish final assembly.

South Korean electronics manufacturer Samsung last week said it had suspended production at its factory in Austin, Texas due to the extreme winter weather that caused widespread power outages across the state. 

Although it's unknown if the shutdown of Samsung's factory in Texas has led to Tesla's decision, the company said in 2019 that the self-driving chips for its vehicles are made by Samsung. 

Tesla's Fremont plant has an annual production capacity of 500,000 Model 3s and Model Ys combined. Its unclear as to how the shutdown will affect Tesla's production volume or if the company will delay getting new vehicles to customers over the next few weeks.

Japanese automakers Honda and Nissan said they would sell 250,000 fewer cars in 2021 as a result of the shortages.

The Reason for the Chip Shortages

The recent chip shortages are unprecedented in the auto industry and appear to have caught automakers off guard, as sales have rebounded and vehicle manufacturers ramp up production of best selling models to pre-pandemic levels.

In addition to the auto industry, the chips are in high demand for consumer electronics, such as laptop computers, gaming consoles and other entertainment devices, which sales have spiked due to the pandemic as people look for entertainment options during the pandemic. 

The high demand led to shortages in the latter half of 2020, but its impact is now being felt by the world's automakers. Another factor leading to semiconductor shortages is rebounding auto sales in the latter half of 2020. 

During the beginning of the pandemic, automakers experienced declining sales due to a stalled economy and rising unemployment brought on by the global pandemic. As a result, automakers reduced their orders for computer chips earlier last year.

But as sales recovered faster than expected in the third and fourth quarters and automakers began to ramp up production, it caused a spike in demand for the chips.

In Taiwan where much of the world chips are produced, the country is working to address the shortages plaguing automakers.

In late January, contract manufacturer Taiwan Semiconductor Manufacturing Co Ltd (TSMC) said it will prioritize production of auto chips and will work to increase capacity, Taiwan's Economics Ministry said. TSMC is the world's largest contract manufacturer of chips. 

Analysts are calling the recent chip shortages "extreme" and predict that the supply chains won't stabilize until spring at the earliest. But with so many of the world's automakers affected by the shortages, it looks as though the shortages might last through the second quarter of this year.

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