Semiconductors are vital for any technology-based item, including home appliances, electronics, trucks, and cars. A minor hiccup in the semiconductor supply chain in early 2020 degenerated into a full-blown crisis across all industries. However, the automotive industry has taken the worst hit.
The scarcity of semiconductors has already caused major automotive manufacturers to roll back their projected production numbers and to delay many pre-ordered models. In return, the carmakers have lost billions of expected revenues, with some businesses that supply parts to them going out of business.
When did it all start?
The problem started in the early months of the COVID-19 pandemic, many countries imposed lockdowns and severely limited movement within and across borders. This caused the auto sales numbers to plummet to all-time lows within a few months. Carmakers responded by cutting back production, which, in turn, forced parts manufacturers to do the same. Semiconductor manufacturers were not spared either.
Most automakers import their semiconductors from Asia. Unfortunately, many Asian countries experienced the harshest lockdown rules, putting a considerable semiconductor workforce out of work. When normal production resumed, they could not put up with the demand.
As the pandemic spread, most people turned to entertainment gadgets such as PlayStations, smart devices, and home entertainment theatres. All production efforts shifted to consumer goods. The automotive industry recovered faster than expected, while semiconductor manufacturers had already shifted a lot of infrastructure to other sectors that require microchips.
The chips industry lacks new capacity
The demand for semiconductors has grown incredibly within the last two decades. Despite scaling up their production, most manufacturers have experienced production capacity utilization of 80% and above. It was even reported that utilization climbed to 90% in 2020.
Unfortunately, at 90% utilization, most manufacturers cannot increase their production, as it would extend the lead times. Due to there being few microchip makers around the world to plug the demand gap, the lack of new capacity means that chip scarcity will continue even longer.
Prospects for chip supply recovery
The microchip shortage is not likely to be resolved in the short term. Automakers require sophisticated chips for their cars. So, they have limited options available. Here are short-term and long-term strategies that automakers and related businesses can apply to deal with the supply-demand imbalance.
Carmakers are using big data to map out areas that need re-adjustment in the wake of microchip shortage. Together with tier-one suppliers, car makers can analyze the value chain to engage the chip manufacturers on realistic delivery volumes.
Depending on car demands, automakers can also prioritize some chips over others. This helps keep the production numbers of the high-demand models high as the company awaits the delivery of other types of chips. Besides, companies can replace back-ordered components with similar semiconductors or feature-rich general user chipsets that serve the same purpose.
In the long term, carmakers need to rethink the way semiconductors carry out their sourcing. They could make long-term contracts rather than the current short-term commitments. A good instance could be 12 months on production and about 6 months on the semiconductor design.
It is also important to reconsider the low stock levels and just-in-time delivery and at least go with some inventory to plug short-term deficits. Besides, carmakers could also invest in supply chain resilience, such as dual sourcing and working closely with microchip manufacturers. It helps them get supply guarantees and gain more power at the negotiating table.