We’ve experienced a global supply chain disruption in the wider electronics industry in the past few years. And seeing as we live in a thoroughly digital age, the chip shortage (which is, to a degree, still ongoing) has reverberated throughout plenty of other sectors – with the auto manufacturing industry being one of the most deeply affected. There, chip shortages have already begun denting sales and significantly stalling production schedules.
Of course, we need semiconductors for many other manufacturing lines of consumer electronics; they’re used in everything from computers and smartphones to cameras and entertainment systems. These days, there’s a reason to be proud of having an available inventory of hard to find semiconductors in stock. However, we’ll use this piece as an opportunity to examine how the global chip shortage has affected the world’s automakers.
What Triggered The Chip Shortage?
To put it bluntly, the chip shortage has been caused by the most basic market imbalance – a lack of supply and strong demand. Naturally, this didn’t happen randomly; the first problems of the current shortage were triggered by the pandemic-triggered lockdowns, which plagued most of the world in 2020. At that point, demand for remote working tech experienced its biggest demand increase ever – and automakers suddenly had a lot of competition for Asian-based semiconductor manufacturing facilities.
This problem was only exacerbated by the huge difficulties experienced by South Asian downstream operations, which were particularly wrecked by the Delta variant of COVID-19. As a result, further supply chain bottlenecks emerged. For instance, Malaysia is well-known for its highly-developed “back-end” work for the chip industry — like testing and packaging. And seeing as this work is more labor-intensive, the processes in that country were especially affected by pandemic-related public health measures.
And sure, car companies winded down their own production when the pandemic began. However, manufacturing started gaining momentum once more by the end of 2020 – but the same could not be said for semiconductor supply. Among other things, the low interest rates enacted by the Fed meant that borrowing money was becoming more affordable, also increasing the demand for cars.
However, while it would be easy to blame COVID-19 for the global chip shortage entirely, things are a lot more complicated in practice. The pandemic merely served as the initial catalyst for the current supply chain crisis, but many electronics industries had their own structural factors that exacerbated the problem. For instance, the auto industry was already amid a major paradigm shift – one that we’re still going through today, years after the pandemic’s peak. All across the developed world, the auto industry is shifting gears towards electric vehicles and automation.
These vehicles are certainly better for the environment, but their production requires more semiconductor chips than were ever necessary for any gas-based car model. Naturally, this doesn’t mean that electric cars aren’t worth it – but they definitely pose new supply chain challenges for the future, many of which will be here long after we’ve finally dealt with COVID-19.
Is The Shortage Over?
While the situation in the semiconductor market is showing signs of improvement and more chips will definitely be available by the end of this year, the shortage isn’t anywhere near being over – at least on a global scale. Even with the latest production increases, the newly available semiconductor chips probably won’t be able to satisfy demand across the board.
Auto giants like Volkswagen estimate that new semiconductor capacities will start fulfilling demand in the next couple of years – but we shouldn’t expect the supply crunch to end before 2024. Experts also point to the fact that “semiconductors” aren’t one homogenous group; they need to have the correct qualifications for every industry, which is why the automotive sector needs specific, matching chips.
Right now, the chip capacities in the auto market are also being increased by the weakness in some competing electronics markets – like consumer electronics, smartphones, and desktop computers. Sales in all of these sectors have been reduced in the past six months, and Taiwan-based foundries are slowly reallocating their production capacities to the industrial and automobile end markets. Still, it’s worth remembering that the chips necessary for today’s automobile parts are starkly different to those used in smartphone and PC manufacturing.
In the future, these problems may also be reduced by the companies that generate demand in this market. In many cases, their foggy tech roadmaps are responsible for mismatching because they don’t clearly define the types of semiconductors they’ll need. The rise of better-defined tech road maps will help Tier 1 suppliers due to higher transparency; companies will be able to approach their product development more strategically.
This would be particularly helpful for the automotive industry because suppliers and manufacturers in other industries – like electronic equipment – tend to share data about supply and demand a lot more throughout the supply chain, helping everyone detect potential issues before they balloon into bigger problems.