The automotive semiconductor shortage which is caused by a myriad of factors in the chip supply chain has continued to impact car manufacturers in recent years. Ever since 2021, the short supply of automotive chips has led to delayed vehicle production schedules and hundreds of billions of losses in revenue for automotive companies.
Let’s find out more about the impact the chip shortage has had on the automotive production lines and the problems in the chip supply chain that caused all of these issues in the first place. We’ll look at why modern automobiles are so reliant on computer chips, and why semiconductor demand will continue to grow. Finally, we’ll look at how automakers are trying to overcome these supply issues, and what semiconductor companies are doing to increase their manufacturing capacity.
The Effects Of The Chip Shortage On The Auto Industry
Consumer electronics manufacturers of devices like smartphones, televisions, and other gadgets account for nearly 50% of semiconductor demand worldwide. Automotive companies follow in second place at 15% of the supply from the semiconductor industry. This means that whenever semiconductor manufacturers find it difficult to meet the demand for various reasons, the chip shortage drastically affects automakers.
Chip shortages have caused production lead times to increase drastically from 03 to 04 months on average to nearly 10 to 12 months, causing many delays for vehicle manufacturers. This means that in the years 2021 and 2022, more than 18 million vehicles were cut from production schedules.
As a result of the semiconductor shortages, the global automotive industry has suffered massive losses in revenue amounting to US$ 210 billion in 2021 alone. Even larger companies like General Motors saw their net income fall nearly 40% in the third quarter of 2021, causing a profit loss of nearly 50% in the same quarter.
What’s Causing The Automotive Semiconductor Shortage
Now let’s look at what’s been causing these semiconductor shortages that have so drastically impacted the automakers in recent years.
Delays In Manufacturing
The manufacturing centers of semiconductor chips, especially those in China and Taiwan were severely affected during the Covid-19 pandemic. Many of their production facilities had to be shut down due to lockdowns on multiple occasions, and when combined with the shortage of workers, the companies were not performing at their optimum capacity to keep up with the demand during this time.
Much of the world’s trailing-edge semiconductor manufacturing happens in places like China, where many companies have also been affected by the export restrictions imposed by the US government. To learn more about how this will affect suppliers of not just semiconductors but also semiconductor design and production technology, read China-US Chip Trade War.
Shortage Of Raw Materials
The production volume possible is also dependent on the supply of raw materials like Silicon, Germanium, and Gallium Arsenide. Makers of semiconductor products depend on other industries that handle the mining and processing of these raw materials. Unfortunately, since China is one of the main suppliers of these materials, many of these industries have faced similar labor shortages during the global pandemic.
Aside from raw materials used, there are other crucial resources needed during manufacturing such as Neon. Much of the world’s purified Neon gas comes from two companies located in Ukraine, which is currently embroiled in a war with Russia. Much of the supply of these resources has been limited ever since the Russian invasion began.
Delays In Shipping
The aforementioned labor issues and lockdowns have impacted the shipping sector as well. The Ningbo port in China is a major shipping hub where much of the raw materials, and other resources needed for semiconductor production, as well as finished products, go through. Many of these important ports were also shut down during the Covid-19 outbreaks, setting back delivery schedules that affected many industries like semiconductor manufacturing.
The Downside Of Just-In-Time Manufacturing
Many companies involved in manufacturing across various industries have kept their supply and demand balanced based on just-in-time or lean manufacturing concepts. This means that the supply capacity is determined by the demand, with surplus kept to a minimum to reduce warehousing costs.
This is fine when everyone involved in the chain works optimally, but when shortages began in the semiconductor fabrication plants, it affected everyone downstream. Automotive chip makers and the automakers themselves did not have the surplus of automotive chips and various other components needed to keep their production going smoothly.
Why The Automotive Industry Is So Dependant On Semiconductors
As new technologies enter vehicles, their production has come to depend on nearly 1,500 chips that need to be fitted to make them functional. Some of the more advanced models with smart capabilities may even go up to 3,000 chips, making them highly reliant on semiconductors, and semiconductor components.
Advanced Driver Assistance Systems And Smart Safety Features
Advanced driver assistance systems rely on an army of sensors, cameras, and processing units to work properly. Everything that helps a driver reverse their car easily, from blind spot detection, adaptive cruise control, collision avoidance, emergency braking, and even the deployment of airbags relies on these systems. Most of these devices contain semiconductor chips to function.
Many of the older mechanical control systems used in vehicles have been replaced with electronic ones. This has made possible the production of cars that are far more efficient, less reliant on oil for maintenance, and significantly lower carbon emissions. The demand for these types of vehicles is on the rise due to rising environmental concerns everywhere. As a result, it becomes even more important to secure the chips needed for these electronic systems.
Many models now come with high-quality touchscreen displays used for displaying crucial information, replacing the mechanical dashboards of traditional vehicles. Many even allow passengers to access a wide variety of entertainment options from music and movie streaming to even simple video games. The infotainment systems are no longer just GPS, radio, and CD players. These systems also require advanced chips to function.
The Automotive Industry Shifting To The Production Of Electric Vehicles
Apart from all the advanced technology being included in vehicles, automakers are in the process of a major shift from traditional cars running on fossil fuels to fully electric vehicles or EVs. While EVs and plug-in hybrids still only accounted for about 8.3% of the market in 2021, it’s a doubling of the market share from the previous year, making a significant increase in demand for these types of vehicles. These electric automobiles need chips to manage their powertrains and batteries, requiring even more semiconductors to facilitate the growing demand customers have for them.
What Car Companies Are Doing To Overcome The Chip Shortage
Many auto manufacturers have begun to rethink how they approach their suppliers to get the crucial microchips they need for the vehicles that need to be produced in the future.
Strengthening The Semiconductor Supply Chain To The Auto Industry
There are a few ways that supply chains can be strengthened for automobile manufacturers. One is to award long-term supply contracts instead of the short-term notices that many suppliers receive at the last minute. These contracts usually come with capacity commitments and minimum purchase volumes which the automakers have to honor. The upside is that they wouldn’t have to beg for more semiconductor products during a shortage with the rest of the buyers.
The supply chains can also be improved by shortening them. Every link in the chain represents a potential breaking point in case of a worldwide disaster, and reducing their number can ensure a more reliable supply. Many companies are also looking at alternative suppliers, especially those closer to home, removing the risk of geo-political issues that are beyond their control.
Warehousing and maintaining a stockpile for a rainy day has always been a traditional way of ensuring a steady supply of resources when needed. While this method incurs additional costs and was replaced by just-in-time inventories, it might be worth looking at again since many of the resources companies need to manufacture their products are not always readily available anymore.
Digitization Of The Semiconductor Supply Chain To The Auto Industry
An automaker may depend on hundreds of suppliers from many different countries. With so many intermediaries producing various semiconductor components and integrated circuits, it may be difficult to know where some of their semiconductors come from. The Ford Motor Company for example had no idea that many of their Tier-1 suppliers were all getting their chips from the same source which faced difficulties when their factory burned down.
One thing that automobile manufacturers can do to shield themselves from issues like this in the supply chains is to digitize their systems. This raises transparency, allowing them to keep track of suppliers, and shipments in real-time. Of course, this requires the various parties involved to be sharing data and use industry-specific protocols to do so.
The Future Of The Automotive Industry Amidst The Global Semiconductor Shortage
The shortage of automotive chips is not going away anytime soon, although the estimated production cuts have dropped significantly from nearly 07 million units in 2022 to 1.3 million units in 2023. There is optimism in the market with production levels coming back up although the chip shortage is expected to stretch out towards 2024 before the situation returns to pre-Covid levels.
If you would like to learn more about semiconductors, how they are manufactured, and the latest happenings in the industry, be sure to check out our blog at Inquivix Technologies. We also provide customized semiconductor solutions to clients in the automotive, telecom, retail, manufacturing, healthcare, and aerospace sectors. We are based out of South Korea, one of the major production hubs in the world of semiconductor products. To learn more about what we do, visit Inquivix Technologies today!
Labor shortages, Covid lockdowns, and even geo-political issues in some countries have led to delays in manufacturing, shipping of finished goods, and raw materials for many companies in the semiconductor industry as well as those that are reliant on it.
Optimistically, the chip shortage will continue to be a factor affecting automakers in 2023, although to a much lesser extent than in 2022, and is expected to end sometime in 2024.