Hopes of recovering lost sales and growth opportunities after the pandemic have not been so optimistic for the automotive industry. Among the many devastating effects of the pandemic, the semiconductor chip shortage is one which has affected a wide range of industries significantly. This shortage was a combination of a lack of demand and production during 2020, and a resulting bottleneck in the chip manufacturing process. This post will zoom into the effects of the shortage on the automotive industry, which has been suffering profoundly.
Semiconductor chip manufacturing
Semiconductor chips are made of silicon and are used to power electric devices. They are virtually everywhere, and in most electric devices you use. The production of semiconductor chips and building the fabs for producing them is extremely expensive and time consuming. Suppliers of chips need to earn a minimum of $3 billion in profits for each fab to be able to generate money, and this has been difficult following the pandemic and its economic consequences. With regards to time constraints, chip manufacturing takes over 3 months. As such, combining the complexity, time, and financial costs of producing semiconductor chips, the shortage has been extremely difficult to face and will take years to overcome.
Chip shortage in the automotive industry
In terms of the automotive industry, semiconductor chips are essential components in the car manufacturing process. These are vital for car features like emergency braking systems.
The chip shortage’s expected costs in 2021 for the automotive industry are $210 billion because of slowed production, much longer lead times and the postponement of new product launches (the forecasted effects of the shortage in 2021 as a whole almost doubled from May to today according to CNBC). These devastating effects are only expected to subside by 2023, when there is expected to be an overcapacity of semiconductor chips.
How has this affected demand and supply?
On the demand side, customers are more willing to wait until the shortage subsides to purchase vehicles. Further, they are more likely to switch between car manufacturers depending on who can satisfy their demand first. This has strongly influenced the role brand loyalty plays in the automotive industry and has also led to individuals moving towards the used car market. Following the pandemic, demand has also risen naturally, and this has been met with reduced supply in the automotive industry.
On the supply side, car manufacturers are starting to look at leaner and more efficient production processes. Make-to-order models are becoming more popular as car manufacturers navigate the chip shortage. This could be an interesting development for the future of car manufacturing post-shortage. Further, car prices are seeing an increase.
The shortage of semiconductor chips has highlighted how the pandemic has influenced the economy in profound ways. Further, it indicates the vulnerable balance between supply and demand forces and it will be interesting to see how and if car manufacturers will overcome the effects of the shortage and make it to 2023.
References:
https://www.bloomberg.com/graphics/2021-chip-production-why-hard-to-make-semiconductors/
https://eu.freep.com/story/money/cars/2021/06/15/car-chip-shortage-2021/7688773002/
Hi Auroraa,
great post! After reading your post, I actually did some research on it myself (out of personal interest). As you mentioned, pretty much all automotive companies are affected by this! Weirdly enough though, Tesla is not (see article https://www.forbes.com/sites/greatspeculations/2021/10/08/how-did-tesla-post-record-q3-deliveries-despite-the-chip-shortage/). Companies like Toyota and GM are all struggling with supply issues and are unable to use different types of chips in their vehicles. As it turns out, Tesla is able to program their cars differently in order to incorporate different chips from different manufacturers. To summarise the article, Teslas are able to use a multitude of different chips in their cars and, in addition to this, Tesla has some very solid (almost questionable) chip supply partnerships in China. Nonetheless, Tesla had record earnings in Q3 and did not have to cut down on production like Toyota and GM. On top of that, they are even planning on relocating certain factories from California to Texas, which is going to add to the production strain.
Hi Lazslo, thank you for your comment. This is really interesting, and I actually did not know that Tesla is doing so well despite this shortage. What is interesting is that the article compares Tesla with Apple who is also doing much better than its competitors during this shortage. I did some reading up after your comment and it seems that the biggest difference between Tesla and these traditional car manufacturers is the company’s innovative capability. Tesla was able to react quickly to the first signs of the shortage and they also use newer chip technology which has rendered them less reliant on components traditional manufacturers are using. I guess the biggest learning lesson in this shortage is that it is extremely important to be proactively innovative and flexible in your supply chain.
Aurora, thanks for the interesting read. It is such an important and underrated topic, therefore I enjoyed reading your blog. Amazing to see how this pandemic led to this chip shortage and again a good example to see how extremely important a lean supply chain is important in such uncertain times. I am employed at Adyen, and here the chip shortage is also negatively affecting the future production of new terminal for POS. It is a worldwide problem and this is something that is definitely going to last for another two more years. An interesting thought is how companies are going to prioritize the production when the chips are gradually coming back. Who are they dragging along and which parties will be slacking?
Hi Jent I am glad you enjoyed the post. I myself work at Adyen too! I like the question you pose. I am not sure how companies will approach the production once the chips come back. What people are expecting, however, is an overcapacity of chips following the end of this shortage. Maybe firms will actually be able to produce more cheaply and meet all demand? Regardless of this, I do agree with you that firms may face a period in the initial stages when the chips come back where they will have to prioritise certain parties when meeting demand. I also think that they are being pushed to re-think their supply chains and partnerships to avoid a situation like this in the future.
The semiconductor chip shortage has also brought up a concern from a European persective. I believe it made Europeans aware how much they are dependent on the Chinese and global chip production. This is something I am really concerned about and want to bring up. I believe that to make Europe less vulnerable in political games, Europe is urged to develop its own techological advancements, or at least partly. But for sure the competitive forces makes this almost impossible for Europeans to challenge global rivals. Probably, this is a problem governments have to take care of. Thanks for sharing this Aurora!
Here I also found an article that questions the chip production share between different continents. https://www.dw.com/en/the-eus-microchip-dilemma-too-little-or-too-late/a-57367537
Thanks for the comment, Arnaud. The points you make are very true and do make me question too. Asia and the US as the main producers of chips does have a lot of control over companies that use this technology. Unfortunately, it is a really complex and high-investment industry so I think it will take a long time, if ever, for Europe to catch up to the progress Asia and the US have made. You are right that EU governments need to be involved in localising chip production through investments and subsidising parties who would like to build fabs in Europe. I think they are actually trying to aim for this but it is a very ambitious goal that will take a long time. In general though, Europe is just not as far ahead in the tech scene as Asia and the US. It will be interesting to see what the next 10 years will look like though!