Automotive Semiconductor Shortages Result From a Perfect Storm

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Carolyn Mathas for PartProcurer.com | Estimated reading time: 4 minutes, 45 seconds

In a recent Fox Business report, Elon Musk cited major industry-wide supply chain price pressure for raw materials and semiconductors for a string of price hikes on his Tesla Model 3 and Model Y. Based on parts shortages, Tesla instituted production suspensions earlier this year. Tesla is not alone. Expectations are that the automotive segment will scrub 1.5 million to 5 million vehicles from its plans in 2021.

Rather than attributing the shortages to only one event, it seems that a perfect storm was responsible. The roots, of course, lie in the early weeks of the COVID-19 pandemic, when auto plants worldwide abruptly shut down upon widespread stay-at-home orders.

The following elements, however, added to the shortages:

• The worsening shortage was exacerbated by chip manufacturing disruption in Texas from unprecedented freezing February weather.
• Because no typhoons hit Taiwan and the drought was the worst in 56 years, the lack of water added potential pressure, as vast amounts of water are necessary to clean wafers.
• Japan’s Renesas Semiconductor Manufacturing halted production after a fire in March dramatically affected the availability of chips for onboard electronics, safety systems such as automatic braking, and infotainment consoles.
• A second fire in July at a Nittobo plant in Japan tightened the supply of glass fabrics used in printed circuit board applications for at least six months. A third fire in October at a plant belonging to Asahi Kasei Microdevices took advanced sensing devices used in automotive and other industries out of circulation.
• When President Trump’s administration began regulating sales of semiconductors to Huawei Technologies, ZTE, and other Chinese firms, the companies began to hoard chips essential to 5G smartphones and other products, including automotive.
• U.S. firms were cut off from chips made by China’s Semiconductor Manufacturing International Corp. after the federal government blacklisted the company.
• Given the low number of travelers, global air-cargo capacity in the first quarter of 2021 was down 25 percent from the previous year. The Boeing 777 grounding further lessened capacity.  

Ford CEO Jim Farley told Automotive News that the current shortage was “perhaps the greatest supply shock” he's ever seen.

Manufacturers were caught with low chip inventory, and when they tried to restock, they realized consumer tech companies were now competing for chips—and winning. The result was for big manufacturers to temporarily stop or cut back on production because of shortages.

Almost every automaker was affected and forced to adjust production schedules. Consulting firm AlixPartners estimates the global auto industry will manufacture between 1.5 million and 5 million fewer vehicles this year than originally expected. Volkswagen, for example, is down 100,000 vehicles for 2021, and the numbers were expected to worsen in the second quarter.

Chips weighed in heavily for the consumer electronics market, with automotive manufacturers scrambling to compete.

AutoForecast estimates that the shortage has impacted 109,710 F-series pickups, 98,584 Jeep Cherokees, and 81,833 Chevrolet Equinoxes. In March, Ford announced that it has taken to building F-150s without the microchips and holding them in lots until the chips can be sourced and installed and the trucks sent to dealerships. Honda, Subaru, Toyota, and Volkswagen also have individual models that have lost more than 10,000 units to the chip shortage in North America.

Listed by estimated volume impact by AutoForecast Solutions, the 10 most-affected cars were all Ford, GM, and Stellantis products, including:

• Ford F-series: 109,710
• Jeep Cherokee: 98,584
• Chevrolet Equinox: 81,833
• Chevrolet Malibu: 56,929
• Ford Explorer: 46,766
• Jeep Compass: 42,195
• Ford Edge: 37,521
• Ford Escape: 36,463
• Ford Transit: 26,507
• Chrysler Voyager: 25,728

Making matters even worse, the shortage is driving up prices of new and used vehicles and threatens to limit new-car sales even as carmakers try to make up for lost sales from the pandemic, according to PureCars.com research.

Automotive supply chains will likely change as a result of the semiconductor shortage. Recently, a bipartisan coalition of U.S. Congressional lawmakers attempting to spend their way via billions of dollars to attract chip manufacturing back to the U.S. while funding research and development of more advanced processors through the CHIPS for America Act. The bill establishes investments and incentives to support U.S. semiconductor manufacturing, research and development, and supply chain security. The subsidies are designed to encourage the construction of more chip factories in the U.S., which require billions of dollars and no less than five years to construct.

Today, much of the world’s electronics industry will continue to depend heavily on existing factories such as those in Taiwan. TSMC produces 70 percent of the global auto industry’s supply of microcontrollers, according to IHS Markit.

Automotive manufacturers must review how well they monitor their supply chains to stay on top of risk rapidly, rethink their “lean” inventory approach, and establish relationship programs that will keep them from being placed last in line should a disruption occur. The most likely outcome, however, is that on some level, history will repeat itself. The evidence? The worldwide electronics supply chain is dependent on Taiwan and geopolitical tensions exist. Is the automotive marketplace distancing itself from that supply chain risk, or will it soon be another major storm brewing?