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Global Chip Shortage 'Crisis' Hits Car Manufacturers

Global Chip Shortage 'Crisis' Hits Car Manufacturers

In recent weeks, car manufacturers around the world have been hit by a serious a serious shortage of semiconductors, prompting them to halt output, and putting the brakes on their post-pandemic recovery.

The problem stems from the convergence of two key factors; the failure to forecast a sudden rebound in demand towards the end of 2020, coupled with the rise in sales of consumer electronic devices throughout the Covid-19 pandemic, such as tablets, laptops, 5G smartphones and gaming consoles.

It also highlights the complexity of car companies’ supply chains, in which a single vehicle can require up to 30,000 parts. Automakers, or OEMs, produce some of these components themselves, however they source many parts from a vast network of suppliers, which in turn source smaller components such as chips from their own suppliers.

According to Dexin Chen, a senior analyst at HIS Markit, strong demand from automotive and non-automotive chips is creating a shortage that may last 6 months.

“This is a typical supply chain bullwhip effect, amplified by the concurrent high demands from other segments. … Our forecast is that it will be resolved by the second half of 2021,” Chen said.

The origins of the shortage can be traced back to how the car market was affected during the pandemic. Supply chain disruptions and plant lockdowns early on in the Covid-19 outbreak were followed by slow sales that persisted for several months.

According to Moody’s Analytics, 2020 saw global sales of light vehicles dropped by 16% from 2019, down to 75.8 million units; a much sharper downturn than the 9% decline following the 200 financial crisis.

However, China led a dazzling recover in the second half of 2020, where vehicle sales rose for a ninth straight month on an annual basis in December, according to the China Association of Automobile Manufacturers. In the US, General Motors reported a 4.8% rise in sales for the fourth quarter, while Toyota posted an increase of 9.4% and Volkswagen a 10.8% increase. Auto sales in Japan have posted an annual increase since October.

This pattern has been mirrored by the automotive chip market.

Lee Pei-Ing, president of Nanya Technologies, said the automotive market showed only signs of recovery in the last quarter of 2020. “It’s not returning yet to pre-COVID levels, but it’s improving significantly. We expect demand will continue to recover,” he said.

According to one industry insider, “Automotive chip providers were quite conservative throughout last year, and they really didn’t want to have much inventory on hand. … When they finally saw demand coming back by the end of last year, they had very low inventories.”

However, chip production takes time. A general power management chip, for instance, takes some 50 days, with another a week or two of packaging and testing processes before the product can be shipped. Automobile-grade chips, which have stricter safety protocols, can take even longer, and also need to go through another long automotive supply chain to be added to electric modules and other parts before car assembly.

So when most chip manufacturers started to negotiate with chip developers last September to understand needs for 2021, automakers and their suppliers might not have been aware of the prospects for a sudden pickup in demand.

Rather, many tech executives say, automotive chip orders came in late last year and early this year. By that stage, the chip industry was already addressing robust demand for 5G smartphones, game consoles, laptops, and other items for the stay-at-home economy or for economic recovery.

The shortages have seen Mercedes-maker Daimler, Fiat, Ford, Honda, Nissan, Subaru and Toyota all reportedly suspend production for days or weeks at a time. Fiat Chrysler was one of many carmakers forced to wind down plants this year as contract chipmakers in Taiwan and China were caught off guard by the multipronged surge in orders.

Continental, the German automotive parts manufacturer, described “largescale supply shortages”, with lead times of six to nine months, adding that bottlenecks were expected to continue “well into 2021, causing major disruptions”.

With workers furloughed, car executives are seeking government help in a bid to see if the supply of chips, which control everything from power steering to anti-lock brakes, can be accelerated. “I am here to protect the fact that my company is treated fairly,” said Carlos Tavares, chief executive of Stellantis, the newly merged Fiat Chrysler and PSA. “I will look for all possible solutions. If I need to I will fight back to ensure its chip contracts are met,” he added.


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