From pandemic to chip shortage – will the automotive industry recover?

9

October

2021

5/5 (2)

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.cnbc.com/2021/09/23/chip-shhttps://open.spotify.com/track/1jy7SkRcmBCTcv4ZMtwz29ortage-expected-to-cost-auto-industry-210-billion-in-2021.html

https://www.cnbc.com/2021/09/23/chip-shortage-expected-to-cost-auto-industry-210-billion-in-2021.html

https://www.bloomberg.com/graphics/2021-chip-production-why-hard-to-make-semiconductors/

https://driving.ca/auto-news/industry/report-half-of-new-car-buyers-planning-to-wait-out-semiconductor-chip-shortage

https://eu.freep.com/story/money/cars/2021/06/15/car-chip-shortage-2021/7688773002/

Please rate this

Global silicon chip shortage explained

1

October

2021

No ratings yet.

It is very likely that you have already heard about this problem, there was and is a global shortage of silicon chips. What you probably haven’t thought about is, why this problem occurred and how much affect it had on the world and businesses. Recently, car manufacturer Opel had to close one of its factories due to a chip shortage. Earlier this year, Ford, Audi and General Motors also had to temporarily cease production (Tweakers, n.d.).

Many products these days rely on semiconductors (computer chips) and at the moment there are just not enough computer chips to meet the industry demand. This causes many popular products to be unavailable for purchase. A very popular example is that it has become incredibly difficult to purchase a PlayStation 5 (PS5) game console (Baraniuk, 2021). This does not only impact the sales, but it also opens up the question for businesses on how to deal with this issue. So, what has actually been happening?

This problem has been developing for years, not months. Well before the pandemic, the rise of 5G pressured the semiconductor industry by increasing demands. Also, the ban that the United States (US) put on the sale of semiconductors and other technology to Huawei, increased the pressure of the industry as chip makers outside the US were flooded with order from the Chinese firm (Keane, n.d.). There has also been a boom in demand for lower cost chips, which are embedded in a growing variety of consumer products (Baraniuk, 2021).

As the COVID-19 pandemic unfolded, there started to be fluctuations in demand which led to stockpiling and advance ordering by tech companies. During the pandemic, people needed to work from home and needed laptops, tablets, webcams and other products to facilitate that need. The pandemic was therefor definitely not the sole cause of the shortage, it however was the last drop in the bucket. According to Intel and IBM, they predict that the chip shortage could last two years. Chip makers have ramped up production and are building new facilities to respond to the sustained demand, however it will take time (Baraniuk, 2021; IEEE Spectrum, 2021).

Now that it is clear how the global silicon chip shortage came into existence, the question that remains is. Could this have been foreseen? Could companies have predicted that this would happen based on the data that they had? In my honest opinion, this could have been predicted, but only if there had been an integrated supply chain between all the chipmakers and all the tech firms that purchase from them. Leading up to and during the pandemic there were lots of releases of new tech products. For example, the PS5 that had been mentioned earlier. But there was more, at the same time the new Xbox Series X was released, as well as new GPU cards by Nvidia. Also, 5G and electric cars were being introduced in the world, but also newer models of regular cars require chips. If there was a truly global integrated supply chain between all these stakeholders, someone would have foreseen this shortage before it was going to happen. So maybe for businesses that operate in the semiconductor industry, they should consider sharing relevant information to prevent such a shortage in the future, since no one can capitalize on the shortage.

References

Baraniuk, C. (2021). Why Is There a Chip shortage? BBC News. [online] 26 Aug. Available at: https://www.bbc.com/news/business-58230388.

IEEE Spectrum. (2021). How and When the Chip Shortage Will End, in 4 Charts. [online] Available at: https://spectrum.ieee.org/chip-shortage.

Keane, S. (n.d.). Huawei ban timeline: Detained CFO makes deal with US Justice Department. [online] CNET. Available at: https://www.cnet.com/tech/services-and-software/huawei-ban-timeline-detained-cfo-makes-deal-with-us-justice-department/.

Tweakers. (n.d.). Opel zet autoproductie in Duitse fabriek stop vanwege chiptekorten. [online] Available at: https://tweakers.net/nieuws/187574/opel-zet-autoproductie-in-duitse-fabriek-stop-vanwege-chiptekorten.html [Accessed 1 Oct. 2021].

Please rate this