The Chip Shortage: Challenges Faced by Auto Makers
Table of Contents
- Introduction
- The Complexity of Modern Cars
- The Semiconductor Shortage
- Impact on Automotive Industry
- 4.1 Revenue Losses
- 4.2 Rethinking Chip Management and Supply Chain
- Adjustments in Production Plants
- 5.1 Dropping Features that Require Chips
- 5.2 Examples of Feature Removal
- Tough Choices for Auto Makers
- 6.1 Prioritizing Vehicle Production
- 6.2 The Build-Shy Strategy
- Consequences: Chipless Cars and Parking Lots
- 7.1 The Build-Shy Strategy Dilemma
- 7.2 High Numbers of Parked Vehicles
- Rethinking Just-in-Time Model
- Auto Companies Taking Control
- 9.1 Stockpiling Crucial Computer Chips
- 9.2 Getting Involved in Chip Design
- Government's Role in Chip Manufacturing
- 10.1 Prioritizing Domestic Chip Production
- 10.2 Challenges and Time Frame
- Production Scale-back and Short-term Impact
- Conclusion
💡 Highlights
- The global semiconductor shortage is affecting the automotive industry, leading to revenue losses and supply chain disruptions.
- Auto makers are making adjustments in their production plants by dropping features that require chips and prioritizing vehicle production.
- The shortage has forced auto makers to rethink their chip management and supply chain strategies.
- Chipless cars are being parked in large numbers, causing indefinite delays for customers.
- Auto companies are seeking more control over the chip supply chain by stockpiling crucial chips and getting involved in chip design.
- The government is investing in domestic chip manufacturing to secure the supply for the future.
🚗 Introduction
Cars have become incredibly complex machines, relying on a large number of semiconductors to control various functions. From the Ignition to the braking system, these chips play a crucial role in ensuring a smooth and safe driving experience. However, the global automotive industry is currently facing a severe shortage of semiconductors, which has had a significant impact on car production and availability. In this article, we will explore the reasons behind the shortage, its consequences for the automotive industry, and how companies are adjusting their production plants to mitigate the impact.
🏎️ The Complexity of Modern Cars
Modern cars are equipped with advanced electronic control units that house numerous individual chips. These chips act as separate organs, each responsible for a different function in the vehicle. They communicate with the hardware electronically, instructing it on how to operate. As cars have become more technologically advanced, the number of semiconductors required has increased as well. Today, a single car may need anywhere from several hundred to more than a thousand chips to function properly.
🧩 The Semiconductor Shortage
The shortage of semiconductors in the automotive industry can be attributed to several factors. The COVID-19 pandemic played a significant role, causing a surge in demand for electronics as people stayed at home. As a result, chip manufacturers redirected their production capacity to meet this increased demand, leaving the automotive industry scrambling for supply. Furthermore, natural disasters and the resurgence of COVID-19 cases in key chip-making regions further disrupted the supply chain, exacerbating the shortage.
💥 Impact on Automotive Industry
The semiconductor shortage has had a profound impact on the global automotive industry. Auto makers are facing revenue losses of approximately $110 billion this year alone. This crisis has forced companies to rethink their chip management and supply chain strategies, both in the short term and the long term. The shortage has also led to adjustments in production plants, with some companies making tough choices to cope with the limited supply of chips.
4.1 Revenue Losses
The revenue losses incurred by the automotive industry due to the semiconductor shortage are staggering. The inability to source enough chips has resulted in production delays and decreased vehicle availability. As a result, auto makers are unable to meet customer demand, leading to a significant decline in revenue. Despite these challenges, some companies have managed to maintain strong financial performance, highlighting their ability to adapt and make strategic decisions.
4.2 Rethinking Chip Management and Supply Chain
The semiconductor shortage has highlighted the need for auto makers to reevaluate how they manage their chips and supply chain. Companies are adjusting their production plants to prioritize the production of vehicles that generate higher profit margins. They are also dropping certain features that require chips, compromising on the overall functionality of the vehicles. By doing so, auto makers hope to maximize the utilization of available chips and minimize production bottlenecks.
⚙️ Adjustments in Production Plants
Auto makers are implementing various strategies to cope with the limited availability of semiconductors. One approach is to drop features that rely heavily on chips, allowing companies to produce vehicles without compromising on core functionalities. While this may result in a reduction in certain vehicle features, auto makers believe that customers are willing to overlook these minor omissions.
5.1 Dropping Features that Require Chips
To counter the chip shortage, some auto makers have made the difficult decision to drop features in their vehicles that heavily rely on semiconductors. These features are often considered add-ons and are not essential for the basic operation of the vehicle. While this may seem like a compromise, auto makers believe that customers are more understanding given the challenging circumstances.
5.2 Examples of Feature Removal
Several auto makers have already implemented the strategy of dropping features that require chips. For instance, the global auto company STELLANTIS, which owns popular brands like Jeep and Ram, has shipped some pickup trucks without an Electronic Detection System that looks out for blind spots. General Motors has produced full-size pickup trucks without software that helps manage fuel consumption. Elon Musk announced that Tesla was removing the adjustable lumbar support from some vehicles due to industry-wide supply chain pressures. Fortunately, these feature reductions have not significantly impacted the reputation or market share of the companies involved.
✂️ Tough Choices for Auto Makers
The semiconductor shortage has forced auto makers to make challenging decisions regarding vehicle production and prioritization. With limited chip supply, companies must carefully choose which vehicles to produce and which ones may need to be sidelined temporarily. This process involves evaluating profitability, customer demand, and overall market trends.
6.1 Prioritizing Vehicle Production
To maximize the utilization of available chips, auto makers have resorted to prioritizing certain vehicle models over others. For example, General Motors has shifted computer chips away from less profitable vehicles and diverted them to models that are in high demand. While this strategy aims to optimize the use of limited chips, it does not guarantee that all prioritized vehicles will have sufficient supply.
6.2 The Build-Shy Strategy
Auto makers have adopted a strategy known as "build-shy" to cope with the chip shortage. This strategy involves continuing to produce vehicles even if they are missing one or more essential chips. The incomplete vehicles are then placed in parking lots around the factory, awaiting the arrival of the required chips. By doing so, factories can keep running, avoiding the costs associated with repeatedly shutting down and restarting production lines. However, this strategy results in a large number of chipless cars sitting idle, causing indefinite delays for customers.
🅿️ Consequences: Chipless Cars and Parking Lots
The build-shy strategy, while effective in keeping production lines running, has led to a significant accumulation of chipless cars in parking lots. Auto makers are grappling with the challenges of managing these vehicles, which remain incomplete due to the shortage of chips. As a result, customers may experience longer waiting times to receive their vehicles, with no definitive timelines for chip availability.
7.1 The Build-Shy Strategy Dilemma
While the build-shy strategy helps auto makers maintain operations, it also presents a dilemma. The longer chipless cars sit idle in parking lots, the higher the risk of additional delays and complications. Moreover, managing large numbers of incomplete vehicles can put a strain on resources and increase costs for auto makers.
7.2 High Numbers of Parked Vehicles
The semiconductor shortage and the build-shy strategy have resulted in an unprecedented number of parked vehicles awaiting chip availability. For instance, Ford reported having more than 20,000 vehicles parked and waiting for chips at the end of March. General Motors faced a similar situation, with around 30,000 pickup trucks stored at a plant in Missouri. These numbers highlight the scale of the challenge auto makers face in balancing production and chip availability.
⏳ Rethinking Just-in-Time Model
The semiconductor shortage has exposed the vulnerabilities of the just-in-time model that the automotive industry has relied on for decades. This model, which emphasizes minimizing inventory costs and maximizing efficiency, requires components to arrive at the factory and assembly line precisely when they are needed. However, during a global crisis like the pandemic, disruptions to the supply chain can severely impact production. Auto makers are now reevaluating the feasibility of the just-in-time model and considering alternative approaches to secure chip supply.
🛠️ Auto Companies Taking Control
Auto makers are taking proactive steps to regain control over the semiconductor supply chain. They are exploring strategies to increase chip stockpiling, seeking direct involvement in chip design, and forging stronger relationships with chip suppliers.
9.1 Stockpiling Crucial Computer Chips
To mitigate the risk of future chip shortages, auto makers are considering stockpiling crucial computer chips. This approach involves creating reserves of essential chips that are most vulnerable to supply disruptions. By stockpiling, auto makers aim to secure a buffer that can support production during times of chip scarcity.
9.2 Getting Involved in Chip Design
Some auto companies are even exploring the possibility of designing their own chips or collaborating with chip manufacturers to create components that require fewer chips. This would reduce their dependence on the overall chip supply chain and provide more control over chip availability. Ford, in particular, has expressed interest in this approach, highlighting the inclination of auto makers to take a more active role in shaping the future of chip technology.
🏭 Government's Role in Chip Manufacturing
Recognizing the critical need for semiconductor availability, governments, including the US government, are taking steps to bolster domestic chip manufacturing capacity. The Biden Administration has pledged to invest approximately $50 billion in research and development to increase domestic chip production. However, building new foundries and scaling up chip production is a time-consuming process that will likely take years to yield significant results. In the meantime, the auto industry will continue to experience production scale-backs due to the chip shortage.
10.1 Prioritizing Domestic Chip Production
The US government's focus on prioritizing domestic chip manufacturing is driven by the need for a more resilient supply chain. Reducing dependence on foreign chip suppliers would provide greater stability and control over chip availability during times of crisis. By investing in domestic production facilities, the government aims to secure the critical infrastructure necessary to support various industries, including automotive.
10.2 Challenges and Time Frame
While the government's commitment to increasing chip manufacturing capacity is commendable, it is not without challenges. Building new foundries and expanding chip production requires significant investments, advanced infrastructure, and skilled workforce. Additionally, the time frame for these efforts to bear fruit is long, as it involves both physical and technological developments. In the short run, auto makers will continue to face difficulties in meeting demand due to the limited chip supply.
🚗 Production Scale-back and Short-term Impact
To manage the chip shortage, several auto makers have resorted to temporary production scale-backs. General Motors, for example, has idled two main factories producing pickup trucks, while Ford has halted the production of its popular F-150 at its Kansas City factory. Toyota, another auto giant, announced a 40% reduction in production in Japan for the month of September. These scale-backs are necessary to Align production with available chip supply, but they have inevitable short-term consequences for customers.
🏁 Conclusion
The current semiconductor shortage has significantly disrupted the global automotive industry. Auto makers are grappling with revenue losses and supply chain challenges, pushing them to rethink their chip management and production strategies. Dropping features, prioritizing vehicle production, and adopting the build-shy strategy have become common practices to navigate the shortage. However, these strategies come with their own set of challenges, including an increase in parked chipless cars and longer wait times for customers. Auto companies are also taking proactive measures to secure the chip supply chain and reduce dependence on external factors. The government's commitment to enhancing domestic chip manufacturing is an encouraging step, albeit one that will take time to yield substantial results. As the automotive industry adjusts to the chip shortage, the long-term implications on production models and supply chain management will undoubtedly Shape the future of the industry.