Why Semiconductor Chips are Crippling the Automotive Industry

Why Semiconductor Chips are Crippling the Automotive Industry

The coronavirus pandemic dealt a harsh blow to the automotive industry in 2020 but sales snapped back. The auto industry faces another huge problem – A shortage of chips essential for countless functions throughout cars trucks and SUVs companies. An array of industries are vying for the precious supply of microchips that are disproportionately produced by a small pool of manufacturers. 

Effects of Pandemic

Early in the pandemic automakers cut production and this is resulted in supply shortage. Chipmakers diverted their supply chains to feed industries not hit as hard by the lockdown and that kept car buyers away from dealerships. The automakers found themselves been pushed to the back of the line. This fate was share by some of the world’s largest manufacturers. They cut back production of even their most popular vehicles and said the crisis will hit their earnings in the short term for the industry. Modern cars are far more technologically complex than their forebears. Today’s vehicles need chips for nearly everything from engine control units to transmission control, brakes, steering. even infotainment systems and safety techs such as sensors and backup cameras. Customers increasingly want cars that offer high-tech features that require complex hardware and software involving a staggering number of semiconductors (chips).

Even in the most rugged vehicles, there can be thousands of chips in a vehicle. It depends on how highly contended it is early on in the pandemic. Auto sales slowed dramatically in march 2020 when lockdown measures took a toll on the economy. Automakers have been setting up war rooms to evaluate how they can rectify the shortages or what engineering decisions they need to make to build as many of the most profitable vehicles as they can. Different industries use different types of chips and the automotive sector has its own specific needs. Chips for cars need to be durable and long-lasting which means several automotive industry chips are legacy chips meaning they tend to be older designs. This is a problem for automakers as those legacy chips aren’t as profitable for the semiconductor industry

The Growing Demand for Chips

Meanwhile, demand for consumer electronics exploded due to increased demand for gaming consoles, televisions phones and webcams. Naturally, there’s a shortage of semiconductors in addition to an already tight supply. Customers are making automakers ramp down their orders while other competing industries ramped theirs up. When the automobile revived sooner than expected, the capacity wasn’t there to fulfil the demand. The automakers are forced to furlough workers and stop production on certain models. Chipmakers were running into their shortages due to production constraints and had begun prioritizing chips for other industries. Often, the ones that are more profitable for them and less likely to have to cut back supplies. In the event of a lockdown, it could cost the whole industry over US$ 60.6 billion. If the automaker plant is down all of the suppliers are not producing, not delivering and not selling parts. The number is likely spread out across the global industry.

Impact on Global Companies

General Motors expects the chip shortage will cut its earnings by 1.5 billion dollars to two billion dollars in 2021. Ford Motor Company is facing a similar hit in the same period somewhere around US$ 1 billion to US$ 2.5 billion. It’s hard to find an automaker that hasn’t had to slow down or suspend production. Honda called for temporary production halts at three Japanese plants. In May, Nissan also called for stoppages in Japan and at three factories in North America. Automakers are cutting back production on some of their best selling and most profitable models. This shows that no product or company is spared. Signs like this suggest that almost everyone is getting hit and those automakers who have access to chips are going to be the winners. Despite the pandemic, the demand for vehicles was relatively strong in 2020 and a lot of the vehicles were sold. The new vehicle transaction prices were rather high but consumers bought it anyway. Consumers were buying pricier vehicles simply because that’s what was available.

Automakers were surprised when sales snapped back the way they did and were caught off guard when they couldn’t secure what they needed but the pandemic seems to have shined a light on a problem. So when automakers began cutting orders it rippled out through all of the tiers of the supply chain. Another problem is that chips are not interchangeable among different products or applications from their earliest stages. They are custom-built for certain needs unlike other materials such as steel where automakers can quickly pivot to another supplier. Car companies have suffered shortages of chips before when there have been plant fires, natural disasters or the financial crisis of 2008 and 2009. Pandemic and shortage of semiconductors created a similar effect on the automotive supply chain. A few conventional automotive companies invested in semiconductor manufacturing. They followed vertical integration because they wanted safety. They also wanted to experience design and manufacturing resulting in establishing their semiconductors fabs. It doesn’t cover their entire demand but it covered enough and those companies are better off today.

In the short term, options are few. Automakers can either work with current suppliers or try to find from where else they can source materials. One tries their best to mitigate the situation and try to start air shipping. All of these things to get the parts to the assembly line because it’s better than shutting it down as building new manufacturing capacity takes months if not years. The industry is recognizing the need to rely less on the few producers. Currently, automotive supplier Bosch said it will open an automotive chip factory in Dresden, Germany by June.  The plant was already in construction before the supply shortage hit and the chips that will be made there are not the same as those currently in short supply. Nevertheless, it is still a sign indicated by industry analysts that the automotive world is trying to reduce its dependence on a small set of chip makers.

In the past, Automobile sector have suffered while electronics industry boomed with features like advanced driver assistance systems, robust infotainment equipment and creature comforts like adjustable seats with customizable settings. The next generation of vehicles is likely to be more advanced. The direction of the automotive industry suggests chips will become an ever more important piece of the product.

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