Global chip shortage throws wrench into the car industry
Amidst booming demand for cars in major markets, global automakers namely Ford, Toyota, Nissan, VW, and Fiat Chrysler Automobiles have been forced to cut production of more than 1.2 million vehicles in North America because they can’t get enough chips that are used for everything from safety systems to brakes and engines. The lead time has stretched to 15 weeks (a 2-week jump from average), or even one year for some rare chips.
To a great extent, the chip shortage has been a ticking time bomb, building since late 2020 due to a few (unrelated) supply-chain disruptions.
Unprepared for a demand bounceback
When the Covid-19 pandemic caused a precipitous drop in vehicle sales in spring 2020, automakers cut their orders of all parts and materials — including the chips needed for functions ranging from touchscreen displays to collision-avoidance systems. On the other hand, the booming sales of electronic devices such as laptops, TVs, game consoles during lockdown have driven demand for semiconductors. As a result, chip manufacturers began to switch to supplying their big customers in consumer electronics and made big strategic bets on the more-profitable advanced chips needed for things such as 5G and servers. As demand for passenger vehicles rebounded in the 3rd quarter, automakers lost out to electronics manufacturers in securing chip supply since major chipmakers already committed their production lines to semiconductors used in consumer electronics. The supply crunch hit automakers even harder due to their aggressive lean inventory practices.
Stockpiling behaviors disrupted the supply chain
The supply crunch was exacerbated by U.S.-China trade tensions, especially during the past year, including Washington policies that gradually restricted the sale of American-designed or -made chips to some Chinese buyers. Fears of sanctions prompted tech companies in China to aggressively stockpile chips. China’s semiconductor imports soared 15% last year and hit a record $35.9 billion in March, Chinese customs figures show. Besides the massive orders to hedge against geopolitical frictions, concerns of a prolonged shortage also prompted some manufacturers to stockpile chips, which consequently drained the limited chip supply.
Natural disasters battered redeeming effort
As chip manufacturers stepped up production to meet rising demand, a series of natural disasters happened and battered the manufacturing process. Severe freezing weather in Texas earlier this year forced Samsung Electronics Co. to close two of its chip factories in Austin temporarily. The auto chipmaker Renesas Electronics Corp.’s plant in Japan was hit first by an earthquake in February and then a fire in March that executives said would require months for recovery. Later, a drought in Taiwan, a major chip-making hub, threatens to further reduce the industry’s output, since large amounts of water are used in the process.
From Horsepower to Chip power
The situation becomes worsen for the automotive industry since it is getting more dependent on electronics that include semiconductors. As cars get smarter, it entails the use of many more chips. Automotive electronics, which may include everything from displays to in-car systems, are set to account for an estimated 45% of a car’s manufacturing cost by 2030, according to a Deloitte report.
Roaring back
Racing to fill orders, large chip manufacturers are dispatching engineers to find ways to boost capacity, some even make multibillion-dollar bets on building new fabrication plants to satisfy the booming demand. China’s biggest chipmaker, Semiconductor Manufacturing International Corp., last month committed $2.35 billion with a government partner to build a new factory focused on older chip-making processes. TSMC earlier this month unveiled the industry’s largest-ever investment, allocating $100 billion over the next three years to boost capacity. In the U.S., Intel Corp. last month pledged $20 billion for two sites in Arizona and signaled further investment commitments are to come this year. South Korea’s Samsung Electronics Co. has earmarked $116 billion in investment by 2030 to diversify chip production.
On the buyer side, carmakers are building some models without needed semiconductors and parking them until chips are available to install. Tens of thousands of these vehicles sit at airport lots, a quarry, a racetrack, and other makeshift holding pens near assembly plants in the South and Midwest.
To get around inventory shortages, some car companies are dropping certain features that require scarce computer chips. Stellantis NV has shipped some Ram pickup trucks to dealers without an electronic blind-spot detection system. GM also said it was building some full-size pickup trucks without software that helps manage fuel consumption, reducing miles per gallon. “By taking this measure, we are better able to meet the strong customer and dealer demand for our full-size trucks,” a spokeswoman said.
The chip shortage crisis is expected to linger on into the second half of 2021. The large manufacturers in automotive and other sectors suffering from the chip shortage need to take a long look at their supply chain strategies and ask themselves: Where have they prioritized cost reduction at the expense of risk management? How can they tune up their supplier-relationship-management programs to be in a better position the next time a fire or a pandemic cuts off supplies of essential parts?
SOURCES
- Why the Chip Shortage Is So Hard to Overcome, https://www.wsj.com/amp/articles/why-the-chip-shortage-is-so-hard-to-overcome-11618844905
- Empty Lots, Angry Customers: Chip Crisis Throws Wrench Into Car Business, https://www.wsj.com/articles/empty-lots-angry-customers-chip-crisis-throws-wrench-into-car-business-11620909719
- Why We’re in the Midst of a Global Semiconductor Shortage, https://hbr.org/2021/02/why-were-in-the-midst-of-a-global-semiconductor-shortage
- How a Chip Shortage Snarled Everything From Phones to Cars, https://www.bloomberg.com/graphics/2021-semiconductors-chips-shortage/
