Excess Capacity

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Excess capacity is a condition that occurs when demand for a product is less than a business or industry could theoretically supply.  While this term is typically used in manufacturing, excess capacity can be applicable in a wide range of activities. 

It may seem strange to be writing about excess capacity when all the news is about shortages and supply chain problems.  However, reversals between shortages and surpluses occur frequently, and often faster than expected.

Investors should make an effort to remain up-to-date on developments in companies and industries of interest.  For example, a material shortage of computer chips, which has resulted in significant pressure on a wide range of manufactured products, appears to be beginning to abate.  Moreover, many industry observers are becoming more worried about pending surpluses and the potential for downward pressure on pricing.

Looking at another material contributor to GDP, the next few years should provide an interesting case study relating to excess capacity and the auto industry.  Currently there is a substantial shortage of passenger vehicles, primarily due to supply chain issues, rather than capacity restraints.  In addition to seeking to resolve supply chain problems relating to current capacity, the automotive industry is rapidly expanding its ability to produce electric vehicles (EVs).  This expansion of EV capacity does not appear to include any meaningful reduction in internal combustion engine (ICE) capacity.  How the industry manages this apparent substantial increase in aggregate capacity, EVs plus ICE, should be interesting, and might provide attractive investment opportunities.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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