Chip Shortage: A New challenge to the automotive industry

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nitially, in the spring of 2020, when COVID-19 pandemic swept across Europe and US, leading automotive players like General Motors, Ford Motor and Volkswagen took immediate measures to halt the production lines to being in tune with the receding demand. Forecasting a possible slowdown, carmakers cancelled all the chip orders which are usually required for driver assistance and navigation control systems. With this, semiconductor producers assigned their vacant production capacities to cater to other end markets like smartphones, laptops and other appliances. With Work-from-home and Learn-from-home models of operation gaining momentum in pandemic, it was evident that demands for smartphones and laptops had gained significant steam. Gradually, automotive industry also observed a reset in demand slowdown with pent-up demand and began to send in their orders to the chipmakers. With a gloomy future laying ahead, buyers started to stockpile the chips with rising uncertainties caused by US-China technology tussle.

This has put tremendous stress on the manufacturing capabilities of the semiconductor companies who are now unable to cater to the sudden rise in demand. Wafer fabrication plants are fine-tuned and are running 24 hours a day for 7 days a week. Setting up additional production lines is not easy as it requires entire year to commence operations and billions of dollars’ worth of investment. Besides, significant disruptions to the supply chain, fire in chip factory in Japan and halting of production due to winter in Texas, United States has further aggravated the issues. Currently, vendors are quoting lead times as long as 32 weeks for the delivery of chips, as per Andrew Feldman, CEO of a chip startup named Cerebras Systems.

Leading automotive companies are attempting to perform some serious damage control in order to cater to the global car demand. General Motors are building light duty full-size pickup trucks without the fuel management module. It has further extended production cuts to its three North American plants. Elon Musk has also introduced alternative chips to Tesla’s production capabilities. It has also considered rewriting the vehicle’s software to accommodate the alternates. The chip shortage is expected to wipe off USD 2 billion from Ford Motor’s 2021 profits. To keep the business afloat, Ford is also launching flagship F-15 pickup truck and Edge SUVs with absence of certain parts. However, chip shortage has led to significant price gains in the global used car market, also recording purchases equal to the new cars.

In case of the chip manufacturers, there lies an uphill task for them as well as they look to remodel and restructure their manufacturing processes to this ballooning demand. Taiwan Semiconductor Manufacturing Company, Limited (TSMC), a major player involved in production of up to 80% of chips worldwide, has announced an investment of USD 2.87 billion to set up additional production lines at its fabrication plant in Nanjing, China. Furthermore, Intel also has decided to allocate resources, particularly for automobile segment, which it had remained distant from until now. It has investment pipeline of USD 3.5 billion to expand its wafer fab in New Mexico, along with array of funds channeled to its plants in Arizona, Oregon, Ireland and Israel.

However, in future, buyers need to optimize their supply chain and operational efficiencies in order to avert a similar mishap going forward. Essentially, companies need to leverage on digital solutions like Big data, artificial intelligence and machine learning for efficient demand forecasting and production scheduling. NXP Semiconductors, a European chip maker is now working directly with automotive part suppliers like Bosch in order to understand future demand scenario. Buyers and sellers need to set up digital platforms in order to collaborate for seamless exchange of data including production schedules, order pipeline, demand forecasts, supply-chain data and many more.

This chip shortage, expected to snowball in 2022 as well, is a harbinger for companies to reinvent their procurement and production models to evade such aftermath in future. Data, being one of the strongest tools at their disposal should be analyzed to predict better outcomes. 

* The opinions expressed in the article are personal and do not represent the opinions of the organization I work for *