Semiconductors are, undisputedly, the brain of modern electronics. They play an important role in fabrication of electronic devices, which make our modern lives convenient. Chip manufacturing using elements such as silicon or germanium is experiencing robust growth. It has applications in industries such as telecommunication, healthcare, consumer electronics, and automotive. The auto industry is going through a transformation with vehicles getting automated and intelligent. This has led to increase in the demand of chips that make the automation and the intelligence possible in our vehicles.
The Covid-19 pandemic brought the global movement to a halt. This resulted in lower demand for passenger and commercial vehicles in 2020. But, as the pandemic started easing and the automotive demand bounced back, the problems shifted to the supply side. Automakers were unable to match the soaring demand because of the semiconductor shortage.
There were several reasons that aggravated the shortage of Semiconductor chips
1) COVID-19 prevention measures – COVID-19 changed the way work is done in many industries. Several industries had the benefit of working from home. But manufacturers had to change their processes completely to comply with the COVID safety norms. COVID prevention measures such as isolation of people, staggering of shifts, closure of lines and ports led to disruption in the supply side.
2) Re-allocation of resources – As manufacturers slowed their output in the automotive industry during the pandemic, other industries ramped up their output owing to the strong demand for laptops, smartphones, and gaming consoles. Chip manufacturers had to quickly shift their resource allocation to focus on these growth industries and put automotive chip manufacturing on the back burner.
3) Supply demand mismatch – The supply demand mismatch in the automotive chip manufacturing cascaded into severe capacity constraint as manufacturers focused on design and less on manufacturing chips
4) Trade friction – Geopolitical tensions between US and China exacerbated the chip supply situation further. Due to the global nature of the automotive and semiconductor industry, not one country is self-sufficient to provide the chips required for production. US wields more power in the intellectual property, design and manufacturing while China holds control over the supply of raw material such as silicon.
The impact of the shortage has affected every automaker globally. Global consulting firm AlixPartners had predicted that chip shortages could end up costing the automotive industry $110 billion for the year 2021. According to Gartner, by 2025, chip shortages will drive 50% of the top 10 automotive original equipment manufacturers (OEMs) to design their own chips. The semiconductor chip shortage is unlikely to ease in 2022. There is a huge opportunity ahead of automakers as the consumer demand is strong, however the semiconductor shortage is limiting their ability to capitalize on the opportunity.
Therefore, automakers are figuring out the best ways to match consumer demand without losing sales. Here are some strategies adopted by automakers around the world.
1) Focusing on Premium Products – On one end, some premium automakers have started allocating the chips for expensive models only and cutting down production for their low-priced models. While on the other end, automakers have cut down on feature heavy products. For example, removal of navigation system or large digital screens and use of plain rear view mirror instead of digital ones.
2) Reworking Software and Tools – Few companies are building flexible manufacturing processes so that they can retool their machines to handle new type of chips that may be easily available in the market. In a similar approach, companies are rewriting software to adapt to the chips that are easily available. Companies emphasized on hiring, training, and retaining talent in the embedded design domain for this purpose.
3) Building Local Manufacturing Capability - Vast majority of chips are manufactured in Taiwan. So far East Asian countries have cultivated a relative advantage in semiconductor production due to cheap inputs and labor cost in that region. However, the shortage in chips have led US semiconductor manufacturers to rethink their sourcing strategy. Considering the huge demand for chips in the automotive industry, US semiconductor manufacturing companies are building new fabrication plants in the US for localized production and consumption. Intel has committed $20 billion to build a manufacturing plant just outside of Columbus, Ohio.
4) Forming Strategic Partnership or Joint Ventures – Some companies are looking at engaging in long-term strategic partnerships with suppliers for building more resilience in the supply chain. Companies are also diversifying the manufacturing network by multi-sourcing same components from different suppliers to build buffer capacity. Alternatively, companies are forming joint ventures with companies such as Foxconn to co-design chips to ensure better stability in the supply chain.
Short term outlook chips availability for automakers looks bleak as the lead time for semiconductor supply is long. It takes anywhere from 4 to 6 months to ramp up capacity. This will require new investment as most of the current capacity is diverted to the smartphone and other industries with very little share for automotive business. However, if automakers keep a long-term view and estimate customer demand better, then they can work with suppliers to stabilize their supply chain. Focusing on features that appeal to customer tastes, co-designing with suppliers, building local manufacturing capabilities, and enhancing embedded software development capabilities can work in favor of automakers in the long term.
Sources:
https://iopscience.iop.org/article/10.1088/1742-6596/1971/1/012100/pdf
https://modera.com/automotive/how-is-the-global-chip-shortage-affecting-the-automotive-industry/
