What Chip Shortage? Tesla To Pay Upfront To Secure Supply

As the auto industry struggles with a semiconductor chip shortage that has forced temporary production shutdowns at a majority of automakers’ plants, Tesla (TSLA) is looking to circumvent the issue by paying in advance for a supply of the chips.

According to Financial Times, Tesla is in talks with suppliers in the U.S., Taiwan and South Korea looking to secure a steady stream of chips. Tesla is also exploring options to buy a chip plant.

The chips that Tesla is looking to procure are the latest generation that are mass-produced primarily in Taiwan and South Korea. Sources for the news outlet suggest discussions of a plant purchase is in the beginning stages but said an acquisition would be difficult considering its “prohibitive costs.”

The semiconductor chips have been in short supply as production has shifted toward the tech industry. Consumer demand for computers and other devices surged during the pandemic, when the auto industry ceased production due to nonessential business shutdowns.

Now that automakers have ramped up production, chip suppliers are unable to keep up with demand, forcing the industry to reduce production, shut down plants, and delay deliveries.

The shutdowns are expected to cost the auto manufacturers 5% of their estimated sales in 2021, according to rating agency Fitch as reported by Financial Times. Ford has said that it expects the chip shortage to reduce its earnings by about $2.5 billion this year.

But on Tuesday, Senate Majority Leader Chuck Schumer, D-N.Y., called for $52 billion in emergency funding for semiconductor chips with the U.S. Innovation and Competition Act of 2021 as a substitute amendment to the Endless Frontier Act.

With the bill, $ 52 billion in emergency funding would be used under the CHIPS Act that was part of the 2020 National Defense Authorization Act – a program that supports legacy chip production for the auto industry, military, and other critical industries.

Schumer is hopeful that the over 1,400-page bill will pass the Senate this week with strong bipartisan support.

Shares of Tesla were trading at $622.31 as of premarket hours on Thursday, up $3.18, or 0.51%.