Global chip shortage puts automotive supply chain under the microscope

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The Chinese auto market experienced a dramatic recovery in the second half of last year, but it came at a price.

The rebound left companies like Volkswagen, General Motors and Honda facing a shortage of crisps As the boom in game consoles, laptops, and TVs lockdowns spikes demand for semiconductors and threatens to overwhelm chipmakers.

Fiat Chrysler was one of more than a dozen automakers forced to idle factories this year, as contract chip makers in Taiwan and China were caught off guard by the surge in demand.

Workers to be in vacations, auto executives are asking the government for help in trying to see if the supply of chips – which do everything from power steering to anti-lock brakes – can be sped up.

“I’m here to protect my business being treated fairly,” Carlos Tavares, managing director of Stellantis, the new Fiat Chrysler and PSA merger, told the Financial Times. “I will look for all possible solutions. If I need it, I’ll fight back [to ensure its chip contracts are met],” he added.

As the might of automakers confront the might of consumer electronics companies, the crisis also puts the auto industry’s ever-growing reliance on chips – and their complex supply chains under the microscope.

A connection frame of the sensor assembly is inspected at the Infineon microchip and sensor manufacturing plant in Regensburg, Germany © Krisztian Bocsi / Bloomberg

Quite panicked

Since only 10% of semiconductor manufacturing plants are used for auto parts, automakers do not have the same bargaining leverage as consumer electronics giants. With no immediate solution available, the shortage is expected to last at least six months.

The production of more than 280,000 vehicles has already been frozen, according to data provider AutoForecast Solution. IHS Markit predicts that up to 500,000 vehicles could eventually be affected.

While it has left the auto industry behind, it is also coming to a time of upheaval for chipmakers. California-based Intel, which this month appointed a new CEO, is trying to regain his crown of leader in advanced chip manufacturing which it ceded to TSMC of Taiwan.

TSMC, meanwhile, is grappling with the fallout American sanctions against Chinese telecommunications group Huawei and chip giant International Semiconductor Manufacturing Company (SMIC).

“The sanctions have meant that some customers have redirected their minimum wage orders to other places, like TSMC,” a China-based chip supplier said. “In the industry we are all quite panicked because the scale of the chip shortage is too great and affects too many types. In the short term, we see no way to solve it.

    Chip shortage hits automakers

Although chipmakers have already faced capacity constraints, industry analysts say the crisis is worsened as groups have little incentive to invest in additional capacity for low-margin chips used in laptops and televisions, and which were in high demand during lockouts.

Instead, meeting demand for higher margin chips essential for 5G networks, data centers, and new gaming platforms launched by Sony and Microsoft late last year is much more appealing. .

“Everything is managed so tightly in semiconductor manufacturing plants that you always run into this problem when there is a big increase in demand, especially after a downturn,” said Richard Dixon, senior analyst at IHS Markit.

Electronic chips being manufactured at the X-Fab semiconductor plant in Ormoy, near Paris © Thomas Samson / AFP / Getty

As automakers try to make sure that the chips they have are used in their most important and profitable vehicles, such as pickup trucks, chipmakers are committed to fixing the problem.

Peter Altmaier, Germany’s business minister, wrote to his Taiwanese counterpart Wang Mei-hua last week, urging his government to intervene. In a letter seen by the FT, Altmaier appealed for help to convince TSMC to prioritize German automakers, whose recovery he said was important for the entire global economy. TSMC said it will make resolving the issue a priority.

Meanwhile, Netherlands-based chipmaker NXP and Japan’s Renesas Electronics have said they are looking to raise prices amid the shortage and rising costs of raw materials. Swiss rival STMicroelectronics is also considering a similar move, according to a person familiar with the matter. STMicroelectronics declined to comment.

Complex supply chains

Not all automakers have been affected in the same way. Toyota escaped relatively lightly after the Tohoku earthquake and tsunami in 2011 prompted it to diversify its supply chain and hold more inventory.

Hyundai Motor, the world’s fifth-largest automaker, avoided crippling shortages because it did not cancel any chip orders when the pandemic hammered sales and forced factories to close in early 2020.

But most automakers keep inventory low, relying instead on “just-in-time” delivery of components to preserve cash flow. The number of middlemen in the supply chain also varies, with some relying on their spare part makers to secure chips, while others prefer to negotiate directly.

Markus Duesmann, VW’s Audi brand boss, said his company had relied on a “level four” supplier for its semiconductors, and that there was “a very long chain with levels of ‘different supply on the components we lacked’.

While the crisis has exposed the dangers of demand forecasting during the pandemic, it also raises troubling questions for an auto industry whose fortunes are set to become increasingly dependent on chips as electric vehicles gain popularity and autonomous driving is developing.

Although they represent only 3% of global car sales, the semiconductor content of electric vehicles is about three times more valuable than that of a gasoline car, according to IHS Markit.

Fiat Chrysler was one of more than a dozen automakers forced to idle factories © Federico Bernini / Bloomberg

Analysts say the changing nature of car technology is likely to herald a profound change in the relationship between auto makers and chipmakers. It is also expected to force semiconductor giants to rethink the way they outsource some of their manufacturing to suppliers in Asia.

“Once we’re out of Covid, the real disruption we’re going to see over the next two decades is how electrification and self-reliance will take shape,” said Joseph McCabe, CEO of AutoForecast Solutions, “After semiconductors, the next one is underway. potentially be when we run out of rare earth materials to make batteries. There’s always the next thing they need to keep an eye out for. ”

The real disruption

Some automakers and auto chip specialists may decide to take more manufacturing in-house. In an effort to avoid a repeat of the crisis, Volkswagen has said it plans to bypass its big suppliers, such as Continental, to develop closer relationships with the chipmakers themselves.

At the same time, potential new entrants to the auto market, like iPhone maker Apple, may be looking to leverage their existing chip bargaining power to gain an advantage, McCabe said.

There is also growing pressure in China for semiconductor companies to produce their chips domestically after a shortage that began last month threatens strong sales of luxury cars and electric vehicles.

“This chip shortage episode has once again shown how urgent and necessary it is to have autonomous and controllable supply chains,” said Chen Shihua, a senior official of the China Association of Automobile Manufacturers.

Traditional PC Column Chart * (m units) showing work from home boosted PC demand

Compression has so far not resulted in a shortage of laptops and televisions, which rely on the IC (DDI) chips used to power electronic displays. But with many countries facing extended lockdowns or restrictions, analysts warn it can happen.

Even as more cracks appear in chip supply chains, automakers seem to have few options but wait their turn.

“It’s a question of fairness and equality. Everyone will have their share, ”said Ashwani Gupta, COO of Nissan, which has been forced to cut production of Note, its new compact car, in Japan. “Everyone is adjusting their productions but we will be out soon.”

Additional reports from Qianer Liu, Song Jung-a, Edward White, Kathrin Hille and Leo Lewis

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