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How Do Airbags Work?Global Chip Shortage Hits Auto Industry Hard
Global supply chain disruptions and high demand for microchips force auto manufacturers to pause production and raise prices.
The Costs of Interconnection
A global shortage in semiconductors is causing major disruptions in automotive manufacturing. As a result, car makers stand to lose billions while consumers will likely see significantly higher prices at dealerships. And while disrupted supply chains and manufacturing bottlenecks are being addressed, the shortage is estimated to last well into the third quarter of 2021.
How We Got Here
The main culprit in the worldwide microchip shortage is the COVID-19 pandemic. However, temporary supply chains disruptions are only part of a wider story about the globally interconnected, interdependent economy.
Demand for microchips was already high before the pandemic, but once the world closed down and so much of our lives and the world economy jumped wholly online demand has grown even further. Microchips are found in an ever-increasing number of consumer products from smart phones and PCs to toothbrushes and refrigerators.
One sector especially reliant on a steady supply of semiconductors, automotive manufacturing. The average new car uses over 100 microchips in everything from the ICU and infotainment system to complex driver assistance systems and even formerly simple items like the rearview mirror. You simply cannot build a new car without them.
But, as demand for cars dipped in the second quarter of 2020 and plants were forced to shutter during lockdowns, OEMs scaled back their orders for microchips from suppliers. With global demand already at an all-time high, those same suppliers quickly found other buyers (the makers of consumer electronics for instance). Now that auto manufacturers are attempting to get back into full swing and meet growing demand, they find current supplies of semiconductors already spoken for. Chip makers are scaling up production and shifting supply chains to meet demand but doing so is a classic example of turning a steam ship. It will be a painfully slow process.
How Bad Is It?
Year over year, microchip sales are up 6.5% worldwide from $412 billion in 2019 to $438 billion in 2020. And demand is only increasing. The shortfall in microchips has meant production slowdowns and outright production stoppages across the automotive industry. Every company is feeling the squeeze: Ford, Toyota, GM, Stellantis, Nissan, Mitsubishi, VW, Subaru, and Honda have all had to limit, halt, or otherwise alter production.
Attempting to protect margins, manufacturers have shifted resources to their most profitable vehicle (trucks and SUVs). Even those plants are seeing pauses with Ford putting F-150 production on hold and Stellantis (formerly FCA and Peugeot) says it too will pause production on the Jeep Cherokee and other SUVs. Even Toyota, who, following the Fukushima earthquake, had stockpiled chips in the event of a similar disruption has felt the pinch. GM is already estimating it’ll stand to lose some $2 billion dollars. Expect other OEMs to face similar losses.
Addressing the Problem
Though suppliers are working hard to meet demand, the shortfalls are likely to persist for months to come. Part of the difficulty is that many chip suppliers have outsourced the actual manufacturing process to a subset of companies. When those few companies struggle to meet demand or face disruptions like those we saw with the pandemic. The consequences of this bottleneck have cascaded down the global supply chain.
In an attempt to get a better gauge on what’s happening, last month US President Biden signed an executive order to review global supply chains including those for microchips as well as pharmaceuticals, large batteries (like those in EVs), and rare elements and precious metals.
As for automotive manufacturers, they, like the rest of the world, will have to make the best of a bad situation, plan better for such disruptions in the future, and patiently wait for suppliers to fill their orders. Car buyers can expect the twin forces of high demand and low inventory to push new car prices higher. Current estimates put the cost of a new car to rise between 10 to 15 percent in the coming months.
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