The automotive industry is slowing bouncing back after the pandemic had brought operations to a grinding halt. However, a new problem has arisen – there is a dire shortage of semiconductor chips that have affected production of vehicles globally. Vacant parking lots and limited purchasing options are just some of the issues cropping up due to this shortage.
What is the chip shortage?
As per a report by the BBC, silicon is the backbone of $500 billion chip industry. In fact, the chips underpin a global economy, estimated at a whopping $3 trillion. Raw materials of the semiconductor business are often shipped from Japan and Mexico, with the chips made in Taiwan, China and some in the U.S.
Chips are not only used in vehicles but a number of other devices and gadgets too. Due to the Covid-19 pandemic and subsequent transition to becoming digital, there was an increased demand for electronics like smartphones, laptops, etc. Since chips are used in manufacturing these, the demand shot up to a point where production couldn’t keep pace with it.
Why did this happen?
As we all know, the pandemic forced automakers, suppliers, and car dealerships to shut shop in March 2020. As a result of which, the economy went into recession. Automakers who had survived past recessions immediately cancelled orders for parts with computer chips. This is because they had an inkling that sales might nosedive.
Sales of new vehicles did fall initially, but rebounded fast too, thanks to pent-up demand and 0% financing offers. Some dealers smoothly transitioned to selling vehicles online. They offered home pickup and delivery services. Now that factories have restarted production, the demand for new vehicles is stronger than ever. Unfortunately production remains outpaced and is yet to catch up.
Automakers and suppliers, who had previously cancelled their orders for parts with computer chips, reordered them. However, the chip capacity was consumed by other devices like phones, computers, video games, etc. According to Joe McCabe, CEO of AutoForecast Solutions, monopoly of global chip production lies with few global, Asia-Pacific suppliers. He states that since everyone closed operations at the same time, there was no way to build inventory products and solutions when businesses reopened. This issue led to a considerable bottleneck in all manufacturing processes.
What does the situation look like?
Back in May, the global consulting firm AlixPartners reported that chip shortages could end up costing the automotive industry $110 billion for the year 2021. The Alliance for Auto Innovation, the trade group representing automakers has predicted the shortage can affect production for another six months. Needless to say, it means fewer vehicles will be manufactured this year.
To keep assembly lines moving and mitigate losses, automakers need to get as many chips as possible. However, it is not clear whether they can make up the production and any revenue losses over time. At present, losses are being offset by higher prices of cars and reduced expenses. Almost every major automaker has been forced to make production cuts. Inventories are extremely low and consumer demand is at a high, so vehicles cost more.
In the first week of June, the average listing price of a new vehicle was $40,566. That is up nearly $200 from the prior week. The average listing price was 5.5% above last year, and 10.3% above the same week in 2019. Even used car prices have shot up – new cars aren’t moving, so trade-ins aren’t happening, causing a shortage of used vehicles.
How long will the chip shortage last?
It is tough to assign a time frame to the chip shortage, but Cisco CEO Chuck Robbins said in late April that it will last for six more months. After that production is bound to be ramped up, so the scenario should improve in the next 12 to 18 months.
What are automakers doing?
In the short term, they are cutting down on production of vehicles that aren’t much in demand. Or those that are not as profitable as pickups and SUVs. This is a temporary solution to redirect chips from cars into the money-making vehicles. They are even manufacturing vehicles and parking them till chips become available. Yet another way they are coping is by building vehicles minus some features. For instance, Tesla has left out the passenger side lumbar support. And GM has omitted automatic start-stop and fuel management module.
However, these solutions won’t work in the long term, so automakers are examining their supply chains. The just-in-time-inventory system that they took from Toyota could be revamped, some with important parts like chips. On the other hand, chipmakers are trying their best to ramp up production and build more capacity, including in the US.
Meanwhile, the Biden administration has formed a task force to evaluate the supply chain of chips. As of now, a majority of the US Senate has voted in favor of legislation that is looking to battle back against overseas competition. It involves a growing threat from China, including investing more than $50 billion into the manufacturing of semiconductors.
The chip shortage has exposed how a limited production capacity of a vital component can turn into an issue of national security. That is why every major global market now has backing from their governments for a combination of domestic and redundant supply streams. Many new, smaller chip producers are likely to scale up to combat the issue of shortage in future, with government money supporting their ventures.
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