‘No chips, no music’ say GM and BMW as semiconductor shortages silence Apple CarPlay and Android Auto

Apple
AAPL
CarPlay is the latest victim of the global chip shortage, and it’s about to get worse.

The Automotive News Europe reported last week that BMW car buyers are finding that their expensive new vehicles cannot connect to CarPlay or Android Auto, the two main smartphone standards.

The lost connection is a perfect metaphor. Investors are expected to lose most legacy auto stocks.

Modern cars and trucks are supposed to come with all modern conveniences. Sophisticated navigation, advanced driver assistance systems and a state-of-the-art infotainment system have become rights.

CarPlay and Android Auto are software platforms developed by Apple (AAPL) and Alphabet (GOOGL). They allow car owners to connect their smartphones and run familiar apps like Google
GOOG
Cards, Waze, Pandora, Spotify (SPOT) and Apple Music. Platforms depend on compliant semiconductors and software.

The continued shortage of chips reveals the biggest weakness of traditional automakers: they’re not tech companies.

For most of the last two decades, that skill set didn’t matter.

Traditional automakers were good at making old-fashioned cars and trucks. General Motors

GM
(GM)
, Ford (F), Stellantis (STLA), Volkswagen (VWAGY), Toyota (TM) and others have built massive supply chains. They have outsourced parts manufacturing and even made many of these suppliers interchangeable. It was a foolproof strategy to build large-scale vehicles and keep competitors away.

Then the Covid-19 pandemic happened.

Expecting slower sales, traditional automakers executives cut orders for semiconductors that power navigation, advanced safety and infotainment systems. Chip vendors agreed, then switched to orders from consumer electronics customers. Automakers have lost their place in the queue. They are paying for their lack of foresight so far. That’s no reason to avoid the actions of most mainstream automakers. It’s worse.

Most automotive companies are still not focusing on integrating software engineering talent. Almost two full years after the shortage began, the industry still depends on solutions from third-party software vendors. It’s a mess with no easy fix, as auto executives believe outsourcing is an industry strength. It’s not.

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TSLA
(TSLA)
is the elephant in the room.

The Austin, Texas-based company has become a vertically integrated vampire in the automotive world, to change the metaphor. Chief Executive Elon Musk held chip orders steady in 2020 and has since ramped up purchases. When supplies ran out in 2021, he asked the company’s engineers to rework the vehicle’s code base to work with microcontrollers, according to documents filed with the Securities and Exchange Commission.

Independence is a theme at Tesla. Its electric vehicles never directly supported CarPlay and Android Auto. While Google Maps is licensed, the Tesla infotainment platform is proprietary. Smartphones connect via Bluetooth, an open standard beyond the control of Apple, Alphabet and chipmakers.

A statement from BMW last week revealed that to maintain its production schedule, the company was forced to switch chips. The Automotive News notes that the silicon does not currently support CarPlay and Android Auto. Platforms have been standard equipment since 2020 in most new BMWs.

CarPlay and Android Auto are the link to the modern digital world.

Auto company stocks have been weak in 2022, but the worst may be yet to come. The industry is awash in debt. Interest rates are rising. The economy is set to contract. Production at major traditional automakers will surely follow.

Volkswagen, Toyota, Ford, BMW and GM owe $211 billion, $185 billion, $154 billion, $127 billion and $114 billion, respectively, according to the latest financial filings. Tesla only has $13 billion in long-term debt.

Investors should be especially cautious with GM shares, down 32.4% year-to-date. Ironically, executives have pushed the company hard on electric vehicles at a time when sales of internal combustion engine cars are needed to cope with rising debt levels.

A statement from GM in 2021 promised to produce only electric vehicles by 2035. And the Detroit, Michigan-based company has 30 new electric vehicles planned by 2025, at a cost of $27 billion.

Although GM shares are down 32.5% in 2022, current GM investors should consider selling hard to protect their capital.

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