Ford Motor Company (F 0.79%) and semiconductor maker GlobalFoundries (GFS -0.99%) recently inked a deal that could not only resolve the legacy automaker's supply chain challenges during the pandemic but also affect the global shortage afflicting the auto industry as a whole. In this segment of Backstage Pass, recorded on Nov. 19, Fool contributors Toby Bordelon, John Rosevear, and Travis Hoium discuss.
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Toby Bordelon: It was interesting when I saw this. I wondered, those comments you mentioned from Ford's CEO, it almost seems like they are signaling: "Hey, we're in the mood to do deals and you should expect something from us because we're not just going to sit back. We're going to be proactive and doing what we need to do to deal with these issues."
John Rosevear: I absolutely think Jim Farley is telling the world: "Come talk to us. Yes, we did this with batteries and what we're seeing now is that wasn't a one-off, we're going to do this with chips, too. We're open for business and the checkbook is good."
Toby Bordelon: I mean, I wonder, do you get a joint venture with a new factory? Do you get a co-location agreement, maybe, like let's co-locate some manufacturing capabilities inside Ford factories? You could potentially see that. You see that in the new factory they've announced. You can see them say, "Hey, GlobalFoundries is going to come into this location and do some chip manufacturing for our F-150 Lightning," or something like that.
John Rosevear: Right. We've got a new electric truck factory. We've got a joint venture with SK Innovation, building a battery factory on-site. We've got a joint venture with Redwood Materials, which is the company started by [American businessman] J.B. Straubel to recycle batteries. We've got that on-site, too, so that we can work with it. That's probably where the conversation started anyway: Do you want to come to a joint venture and build chips for us? That could go in all different directions from here, but what seems likely is that something will come of it.
Toby Bordelon: I think it's fascinating and I also think like that as investors, I think we should look at this, and we should recognize that maybe this is going to become a trend across industries. When people start doing deals like this or doing closer relationships and manage their supply chain in a more efficient way.
I mean, you talk to people in the logistics industry, I've seen quotes all over the place like "Yeah, these supply will last in 2022, maybe 2023." It's no longer the case you can just say, "Basically, it'll get back to normal in a couple of months." I think you've got to be proactive, you've got to start to look at your supply chain. What does it make sense to do now to deal with this? Ford's saying, it makes sense for us to do this right now and maybe even more.
John Rosevear: In some level, that comes out of the simple question, do you want to be dependent on a separate company that's halfway around the world for critical products, or do you want to be able to walk over to the co-located joint venture factory that's near your assembly plant and say, "How are the chips doing today?" or whatever. If you have an issue, if there is a bottleneck, you can be right there because in a way, it's already part of your business.
Travis Hoium: Do you think that's the direction that this is headed: is manufacturing, co-location? There's a lot of industries where they've done that, like TVs, just to make the whole process more efficient. Or is Ford trying to pull some of this technical knowledge in-house through a partnership. I mean, Apple's an early example of, instead of buying chips off the shelf from other people, they started designing them in house and they are using these foundries.
In their case, TSMC, but GlobalFoundries would be an example to basically be a third-party manufacturer. It seems like the car companies have accidentally figured out that they are more dependent on chips than they thought they were through this pandemic, and this would be an opportunity for them to do multiple things at the same time. Maybe get some dedicated supply and increase their knowledge base and advance toward autonomous driving, electric vehicles, all that stuff. Is this all of those things in one, or is there one specific thing that's driving it?
John Rosevear: I think the train of thought at Ford probably started with: We're dependent on very specific chips that are commodities that are made by parties with whom we have relationships but no control. The factories are far from ours and so forth, and oh, the supply chains break down, COVID happens, and so on. Then moved on to, if we're going to make our own chips, let's make custom chips that fold more features, more capabilities into our vehicles. Now, Ford is talking about, there were hints that they're going to bring chip design expertise in-house. They've already brought a lot of software expertise in-house over the last few years, shockingly, I mean, given where cars are going.
I think this is another step in the similar direction for them: "Yeah, we want to have more control over these products. We've realized that commodities give you so much, but with where our cars and where the industry and where consumers wants are going, rather than depending on other people to develop more-sophisticated chips for us, let's design them ourselves so that we know they do exactly what we want them to do, so that we can fold in things that we think give us a competitive advantage, and let's have somebody like this company make them for us, to our specs."
Travis Hoium: And if you can put yourself in the front of the line, it's worth it financially, given the money that we've seen lost in revenue from companies like Ford. I mean, Apple has done this and that makes sense in iPhones. Do you think about the value of an F-150? I mean, how much would they give per vehicle to have all the chips that they want in 2021.
John Rosevear: You're not just first at the line, it's your line because you own half the factory through a joint venture, and it's right next to your assembly plant or a train ride from your assembly plant or whatever. We don't have to try to outbid GM and BMW and Tesla for the limited supplies of commodity chips that are available. We have them, it's assured.