The Global semiconductor shortage is resulting in automobile Production Cuts.

The world economy is slowly gathering steam with many people getting vaccinated all over the world. The covid-19 pandemic has played a big role in bringing the world on its knees, troubling the whole world; resulting in a large number of deaths and the loss of a large number of jobs by hitting production and causing disruptions across the supply chains.

This has created shortages in many fields and semiconductor is one of them. Semiconductors are the backbone of a digital economy and digital devices use chips for controlling the display, managing power, or operating a 5G modem. Their involvement is much wider as they enable safer transportation, cleaner energy, greater broadband access, and a more efficient energy grid.

Reasons for the shortage of Semiconductors:

Chips are a critical component in iPhones, personal computers, games control, and electric vehicles. Due to the lockdown and work from home; schools last year rushed to get orders filled for laptops as the students had to study from home. The computer manufacturers struggled to get chips and the other components. The schools even found themselves competing for laptops against many companies which were placing huge orders to enable their employees to work from home.

In July last year, a fire at a Japanese factory cut off supplies of special fiberglass for printed circuit boards, and in October again in Japan, a fire at a Japanese plant belonging to Asahi Kasei Microdevices took advanced sensing devices used in automotive and other industries out of circulation.

Another factor was the constraints in the global transportation systems. During the initial phase of the pandemic, much of the ocean freight was not coming out of the Chinese ports. There was also a shortage of shipping containers all over the world as they could not be transferred due to the prevalent disruptions. This resulted in skyrocketing the hire price of containers and the companies had to pay a premium for them.

Many of the companies as a result had to shift to airfreight. But there was a problem with this too. The airfreight system has been experiencing a higher demand to ship the Covid-19 vaccines on time. There has been a drop in passenger travel due to the dangers associated with Covid-19. This means that there are fewer planes available to carry the freight.

The chip shortage has been building since last year due to supply chain disruptions. As the Covid-19 played havoc with the world there was a drop in the vehicle sales in the spring of 2020 due to which the automakers cut their requirements of the parts and materials which included the chips needed for various functions like touch screen displays to collision avoidance systems.

For a time this was all fine but when in the third quarter the demand for passenger vehicles rebounded, the chip manufacturers had already committed their supplies to customers in the consumer electronics and IT.

There were other geopolitical factors such as the Trump administration began regulating the sales of semiconductors to Huawei Technologies, ZTE, and other Chinese companies. These companies as a result began stockpiling chips that are required for 5G smartphones and many other products. The American firms which used to get their supplies from China’s semiconductor International Corporation were unable to get the chips as the federal government had blacklisted the firm.

There was a big storm in Texas in February 2021, that caused power outages and forced many chipmakers in the state offline, and aggravated the supply situation. Japan’s Honda Motors had to suspend production at many of its facilities in the US due to the resultant disruption.

Result of semiconductor shortages:

Alixpartners, a consulting firm predicts that the global auto industry will lose $60 billion in revenues this year due to the chip shortage which the car manufacturers use for purposes like engine control unit, a digital panel that includes speedometer and fuel gauge, infotainment systems, power steering, and brakes.

Ford, Toyota, Nissan, and Fiat Chrysler are the global carmakers that have scaled back output and many carmakers have announced that they are unlikely to meet their 2021 production targets.

Better planning could have been done by the carmakers to avoid this situation. There was poor decision-making involved. Due to the system of just in time and other lean inventory practices, many manufacturers have become vulnerable. When the vehicle sales rebounded the automakers lost out to the nimble electronics manufacturers that had much better planning and visibility of the entire big picture and also had long-term relationships with the semiconductor manufacturers.

They had already secured their supply lines. The advanced systems in a car have resulted in them becoming like electronic devices. The automakers now have to compete with demands from other industries like electronics and the ones providing internet connectivity to their products.

Samsung Electronics has warned that the chip shortage which is disrupting car production could spill over to the technology sector as well.

Volkswagen and General Motors have been forced to curtail production due to the shortages. The supply is not expected to improve at least till the second half of the current year. Honda has said that it would have to suspend production in many of its North American factories due to the lack of semiconductors. Even its plants in Canada could be affected.

Other major automakers like Ford, Fiat Chrysler, and Nissan have also confirmed the problems. There is an average use of 50 to 150 chips in the cars and they are being deployed in driver-assistance and navigation control systems. Infineon Technologies, the $57 billion German group, estimates a traditional automobile uses microprocessors worth about $400 in a car. Fully electric vehicles need twice as much and self-driving ones will use far more.

Volkswagen CEO Herbert Diess remarked to CNN,“ Not the entire vehicle lineup, but some models might be constrained.” He estimated that the automaker had “probably lost 1, 00,000 cars this year, which would be very difficult to recover in the second half.”

If the chip shortage persists the production cuts could reduce the inventory of cars, trucks, and SUVs in the US and many other markets. Toyota was forced to cut production of Tundra pickup at San Antonio, Texas; Ford was forced to schedule downtime at the Kentucky assembly plant. Fiat Chrysler had to temporarily close car factories in Ontario. Nissan had to adjust production in Japan.

In many cases, automakers have stopped making slower-selling vehicles to divert the chips to hotter segments of the market, including pickup trucks and SUVs. General Motors has said that chip shortage may slash its earnings by $2 billion this year and Ford Motor estimates a hit to its bottom line by $2.5 billion.

There has been a structural change in the semiconductor industry. Many of the top semiconductor companies only design the chips and the technology in them. Other companies called the foundries actually make the chips. The foundries are run by companies like TSMC in Taiwan and Samsung in Korea, and they are making chips at their maximum capacity.

The automotive industry is realizing that it constitutes a lower priority at the foundries. Only 3% of TSMCs sales were from automotive chips as compared to 48% for smartphones. The tech companies have better volumes and higher margins and they rarely cut down on production, unlike the automakers.

Actions being taken to improve the situation:

The foundries are aware of the issues facing the auto industry and TSMC which is considered the most advanced foundry has said that it was trying to help the auto companies and would spend $28 billion this year to increase its capacity.

The large automakers which are currently suffering chip shortages have to take a long look at their supply chain management and consider if they have prioritized cost reduction at the expense of risk management. They have to tune their supplier relationship management in such a way that the next time there is a shortage like the present situation they do not suffer.

The United States and European Union are considering subsidies for domestic chip manufacturing. The Biden administration has created a 100 day supply chain review focused on semiconductor manufacturing, critical minerals, and high-capacity batteries. The Semiconductor Industry Association of the US has urged the administration to provide incentives for semiconductor manufacturing in the form of grants and tax credits.

It is predicted that by 2030 Asia will control more than 80% of the global semiconductor manufacturing supply. Samsung Electronics has revealed plans to build cutting-edge semiconductor facilities in the US for $17 billion that is likely to create 1800 jobs.

The US still dominates the microprocessor research while it lags in the most advanced chip factories. Taiwan is dominant in most advanced manufacturing while South Korea also produces many materials and manufacturing equipment. China is progressing both in semiconductor design and manufacturing and with the help of the state has invested heavily in manufacturing capabilities.

The policies regarding semiconductors should be altered carefully. The production of semiconductor chips involves 1000 steps and passes through international borders several times before reaching the end customer. Policy change too can have a global effect.