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Home / Blogs / A look at the chip shortage that is battering the auto industry

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A look at the chip shortage that is battering the auto industry

Jan 26, 2021

Resilinc Editorial Team

Automotive Industry, Supply Chain Disruptions

The COVID-19 pandemic sent U.S. auto sales plunging in the first half of 2020, leading automakers to sharply cut their orders for parts and materials. But by the summer of 2020, auto sales started to rebound dramatically—and by Fall automakers ran head-on into an unprecedented shortage of semiconductor chips. Resilinc’s EventWatch AI began alerting customers in October about a likely chip shortage and the impact it would have across the high-tech and automotive industries over the coming months.

Reporting by the BBC, Bloomberg, Wall Street Journal and others points to a perfect storm of supply chain issues that by January 2021 had forced Daimler, Fiat Chrysler, Ford, Honda, Toyota and other automotive giants to shut down plants or cut back production of many types of vehicles. The pain wasn’t limited to the United States—according to Automotive News, a spokesperson for the China Association of Automobile Manufacturers forecast a “relatively big hit” for Chinese vehicle production in Q1 2021. In fact, Chinese firms were the first impacted since China—the world’s largest auto market—recovered rapidly from the pandemic’s first wave and auto sales began to recover in April, months earlier than in the U.S.

Modern vehicles are increasingly dependent on semiconductor chips, with 40 or more in a typical vehicle and 150 or more in advanced models. They’re essential to functions from touch-screen controls to collision avoidance systems. And as Automotive News’ article recently pointed out, “It takes only one missing part, no matter how mundane, to halt production of a vehicle anywhere in the world.”

The car companies’ rush to procure more chips occurred when demand from semiconductor manufacturers’ largest customers—makers of computers, smartphones, game consoles and other IT and telecom gear—had soared due to stay-at-home practices. For example, businesses upgraded their digital infrastructure to handle online meetings and employees working from home and telecom companies boosted their capital spending, all of which drove higher demand for chips.

Another trend—that took root before the pandemic—compounded the current supply shortages. As the largest semiconductor companies shifted to 12-inch silicon wafers, manufacturers such as Infineon, NXP and Renesas continued to make simpler automotive chips on eight-inch wafers, all the while outsourcing production of their 12-inch chips to firms like TSMC. When demand picked up in Q3 2020, “manufacturers with plants using older eight-inch wafers weren’t easily able to increase production [because] new equipment [for older eight-inch wafer production is] harder to find,” according to Syed Alam of Accenture, as quoted in the NYT.

By late January, it was unclear how long the shortages would last. What’s more chip buyers may face additional shortages due to production ramp-downs during the Lunar New Year (which starts around February 10). Companies usually factor in the New Year holidays by pre-ordering inventory from companies based in China, Taiwan, and other Asian countries. Because chips were already in short supply well before the holidays, companies may not have been able to build their usual pre-holiday safety stock.

On the bright side, Bloomberg reports that TSMC, the world’s largest chip manufacturer, will increase capital spending to a “staggering $28 billion for 2021, with the foundry pledging …  that automotive chips will be a priority.”

But as automakers increasingly prioritize electric vehicles, demand for chips in the more technology-intensive vehicle platform will increase even more. The chip shortage shows the complexity of modern supply chains in the automotive industry, with automotive analysts predicting that we’ll see more of these issues going forward as key parts of new technology are developed for new electric drivetrains.

For companies in the automotive industry, a flexible, agile supply chain needs to be prioritized in order to navigate the changes. The ability to quickly see the issue, understand its impact, and react accordingly will be essential.

***

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