The Dominos Are Falling for the Automotive Semiconductor Shortage
Michael Knight, president of TSG, offers a look into how the semiconductor shortage for automotive production is a multifaceted issue years in the making.
As 2020 progressed through the COVID19 pandemic, industrial businesses of all kinds shook off the shock and started to move with purpose, much like a startled possum recovering from a perceived threat. This was especially true for the electronics industry.
As 2021 started off, articles were covering these prevailing semiconductor shortages and the effect they are having on OEMs’ abilities to ramp production on everything from gaming consoles to automobiles. The news specific to automobiles has been particularly grim. Pre pandemic, the passenger vehicle market had been well off its peak production levels for several years and output was cut even further as the pandemic took hold.
But a funny thing happened.
Vehicle sales held up and even began to increase, and dealer inventories quickly shrank. So, the passenger vehicle manufacturers geared up and began loading orders onto their supply chains for parts, a growing portion involving electronic components.
Figure 1. Vehicle sales have increased, affecting dealer inventories and putting pressure on automotive manufacturers.
While increasing lead times and allocations in the semiconductor sector have dominated the automotive news, it is worth noting that many other electronic component sectors are also under stress due to the rebound in vehicle production. Things like high capacitance ceramic capacitors, power inductors, and high-temperature, high-power connectors are also in short supply. Even if chips were plentiful, the car, truck, and SUV makers would be in trouble as it only takes one missing component to shut down a production line.
What Causes This Hunger for Components?
So how did this happen to an industry that has as much buying power as the automotive industry? Well, it starts with the fact that the electronic content of new vehicles is snowballing. This is especially true for hybrid and fully electric vehicles, the production of which is forecasted to double to over 12 million per year in the next couple of years. In aggregate, forecasts call for as much as a 30 to 50% increase in electronics content per vehicle over the next couple of years.
Figure 2. The demand for electric vehicles is set to grow exponentially in the coming years, making electronics components more essential to the automotive industry.
On top of that, many of the electronic components that go into a new car are designed specifically for automotive applications. Adding additional capacity doesn’t happen in mere moments, or even months; it takes quarters, sometimes adding up to more than a year, to bring new capacity on-line for many electronic components — semiconductors first and foremost. And many of the 50 to 150 chips used in the average vehicle are made with older fab technologies that the semiconductor companies are reluctant to spend more money on as the newer technologies are more efficient and profitable.
Electronic Component Consumption Goes Beyond Automotive
This trend toward increasing electronic component consumption isn’t limited to the transportation industry. Consumer electronics, telecommunications, and computing are also industry examples where unit production and component consumption are both growing.
Figure 3. The growth of TDDI IC shipment from 2019 to 2021 for smartphones (left) and tablets (right). Units are in millions. Image courtesy of TrendForce.
For example, the new 5G smartphones that are starting to mainstream use 50% more ceramic capacitors than their 4G predecessors, and notebook computer production increased 22% last year (per TrendForce) in response to the growing work-from-home movement.
Virtually all of the electronic component manufacturers who service the transportation sector also sell into these other sectors and this overall rising tide in demand has given them options on which customers get priority. This has led to a “second shoe” dropping on the automakers.
With their volumes and reasonably long product life cycles (when compared to say the mobile phone business where new models often are replaced before their second birthday), the automakers are notorious for driving a hard bargain with their supply chains. They demand, and get, best-in-class component pricing, just-in-time inventory support, and very favorable terms that enable them to reschedule with little to no notice, incur low liability for not living up to an agreement, and grant them the ability to hit a supplier a significant financial penalty in the event of a production stoppage.
So as industry output slowed in the years leading to COVID19, component manufacturers shifted freed capacity to other electronics sectors where the terms weren’t as onerous, and the margins were better and learned to live with less automotive-related volumes running through their plants.
Chip Manufacturers Shifted Their Supply
As automakers snapback, they expected the same capacity to be there waiting for them only to find that it had been fully absorbed by companies making appliances, medical equipment, computers, et cetera. And because of automotive’s industry-wide practice of just-in-time inventory and buying directly from the component manufacturers rather than utilizing the supply chain services of distributors and contract manufacturers, there was no inventory buffer waiting in the wings to save the day.
If these industry dynamics aren’t enough of a challenge, the ongoing trade disputes between the U.S. and China have complicated things greatly for price-sensitive U.S. automakers whose supply chains have become heavily dependent on Chinese sources. Further complicating things is the increase in annual severe weather events that regularly snap links within all supply chains, costing companies billions of dollars in lost profit due to costs associated with mending their supply chains, and sales that are missed while in the recovery process. This has contributed to the “perfect storm” that has swamped the passenger vehicle supply chain.
The Challenge of International Supply Chains
Companies in many industries that have complex, international supply chains are having to come to grips with the fact that their supply chains are not very disease resistant or weatherproof.
The more links in the chain, the more of a problem this becomes. A survey conducted by Jabil Electronics last year found that the typical automaker has 250 tier-one suppliers and as many as 18,000 suppliers across their extended supply chains. That’s a lot of different operations that can be affected by a fire, flood, earthquake, political unrest, tariff, and/or infectious disease. When you think about it, it is a wonder that things function as well as they do.
There are no quick and easy fixes for these pitfalls and obstacles. So, for now, the auto industry is going to have to contend with as much as $61 billion in lost sales, and billions in associated lost earnings due to supply chain disruptions, this time lead by, but not limited to, semiconductors.
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