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Almost every key automaker is ramping down production and furloughing employees amid a global semiconductor (chip) shortage, which is causing a bottleneck in the automotive supply chain. Ford, General Motors, Mazda, Nissan, Subaru, Toyota and Volkswagen have announced that they are reducing vehicle output in Q1 of 2021 due to the current difficulty of obtaining chips.

The Backstory

The automobile industry faced widespread factory closures in the spring of 2020 due to the spread of COVID-19 (coronavirus). While production was on pause, automotive companies required fewer semiconductors, which are necessary inputs of any computer system. Semiconductors are instrumental in automotive manufacturing to enable driver assistance capabilities, power windows, navigation, engine control and safety features, such as tire pressure alerts and collision warnings.

When automobile manufacturers paused production, upstream semiconductor manufacturers limited their output of chips. Vehicle manufacturing picked up again at the end of 2020, and upstream chip providers boosted production as well, but not enough to satisfy the automotive industry’s unexpected uptick in demand. Shortages are primarily impacting the supply of microcontrollers, which are a type of semiconductor consisting of a processor and other modules. Taiwan Semiconductor Manufacturing Company (TSMC) manufactures about 70% of the global supply of microcontrollers. TSMC’s control of the market has made it difficult for auto manufacturers to diversify their risk levels when sourcing microcontrollers.

At the same time, demand for chips from the tech industry has been rising sharply in recent years due to the shift in consumer and business preferences toward electronics reliant on semiconductors (e.g. smartphones, game consoles, televisions, laptops and digital cameras). The coronavirus pandemic has exacerbated this trend tremendously by preventing individuals and organizations from carrying out processes in person. For example, socializing, shopping and working have all been increasingly carried out online due to widespread stay-at-home provisions and health-conscious sentiment. Stay-at-home provisions have also spurred an uptick in tech services and, subsequently, have strained data centers that power these services. The tech industry’s rising need for semiconductors has made it even more difficult for automotive manufacturers to obtain semiconductors and has caused prices to skyrocket. Upgrades in automobile technology have also meant that each car requires many more semiconductors than before, especially among electric vehicles.

The Consequences

Ford is one of the most recent automotive providers to announce reduced production at the hands of the semiconductor shortage. Ford CFO, John Lawler, said that based on estimates from upstream chip providers, Ford could see a 10% to 20% decline in Q1 2021 output relative to planned output levels. This reduction means that Ford could lose profits of $1 billion to $2.5 billion in 2021. Declines in vehicle output can harm automotive manufacturers’ financial standing right away, since revenue is logged right when manufacturers send vehicles to dealerships from the factory. Major car manufacturers have been attempting to curb production of less in-demand vehicle models in order to maintain production of their most critical car models. For example, General Motors announced in early February that it is pausing operations at three factories in North America that produce vehicles such as the Chevrolet Malibu, the Cadillac XT4, the Chevrolet Equinox, the Chevrolet Trax and GMC Terrain SUVs. General Motors is limiting production of these vehicles to keep up the manufacture of other SUVs and trucks, which are key producers of profit for the company.

Leading global chip manufacturers, including TSMC and United Microelectronics Corporation (UMC), have disclosed that they are currently allocating funding toward boosting chip output levels, but this expanded output will require some time to come to fruition. Presently, lead times for chips are reaching lengths of more than 40 weeks in some cases, whereas lead times in the automotive sector generally span about 26 weeks.

Supply Chain Takeaways

The chip shortage and subsequent decline in automotive manufacturing stand to introduce a host of other problems. As automotive vendors reduce output, their upstream providers will do the same, causing a ripple effect throughout the supply chain. Currently, the automotive industry relies on a just-in-time supply chain model, which necessitates daily distribution of components to minimize inventory levels. Many auto manufacturers are considering doing away with this system and boosting stockpiles of semiconductors along the supply chain to mitigate the risk of shortages. Reinhard Ploss, the CEO of Infineon Technologies, which is among the leading semiconductor producers worldwide, said that despite room for improvement in the auto sector’s supply chain, there is a finite amount of time that semiconductors can be stored. Ploss mentioned that eventually stored chips cannot be used due to the deterioration of their condition. Revamping the auto supply chain is going to be a significant challenge. It’s time for all stakeholders to start chipping in.


By: Remi Nathanson

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