Chip Shortage and Its Impact on the Auto Industry


There’s always so much in the news about the automotive industry; from new technology to electrification; groundbreaking design to company and brand takeovers. One story that has been particularly dominating the news cycle over the past year or so — beside the impact of the COVID-19 pandemic, of course — has been the global chip shortage that is damaging productivity.

In today’s blog we’re taking a detailed look at the crisis, how it started, how it has developed and how it now impacts the auto industry overall.

1. Background: What Is the Chip Shortage?

The phrase “chip shortage” is one that has been passed around quite freely since about March 2020 when COVID-19 started closing down many of the chip manufacturing plants. But what are these “chips,” exactly? There are surely many hundreds of types of microchip, what chips are we referring to when we talk about “the chip shortage”?

To be precise, we’re talking about very small silicon transistors on semiconductor chips. They are fundamental building blocks of just about anything at all that is computerized, and you can have as many as billions of transistors on a single chip. The transistors are “printed” onto a wafer-thin piece of silicon in a process that is known as lithography.

Why Do Cars Need Semiconductor Chips?

In non-electric cars, the semiconductors are used on a variety of interactive functions and features of the car, including infotainment, digital instrument displays, navigation and ADAS features. The newest ADAS features are increasingly integrating AI-like systems that are aimed at making the car more autonomous from the driver’s input. To manage any of this work, you need semiconductors.

As cars continue to become more sophisticated, the demand for chips will only increase. The demand won’t just be about something as basic or fundamental as quantity, but also about their quality and technological level. Where some ADAS features used to be reserved only for high-class models like the Mercedes-Benz S-Class, they are quickly filtering down into more budget-friendly models. The more mass-produced cars have these features, the more semiconductors that are needed.

The Current Shortage

These semiconductor chips are currently in short supply, with production working at capacity and countless back orders still to fill. Besides being the basis of computers, consumer electronics and other products, the automotive industry has also seen a surge in demand since modern cars are increasingly computerized with digital displays, advanced automated systems and even AI being employed within them.

The surging global demand combined with the impact of the COVID-19 pandemic has created a serious bottleneck in supply. These semiconductor chips are not something that can be thrown together in just any factory. The world currently depends on a relatively small number of suppliers, among the largest of which is based in Taiwan, called Taiwan Semiconductor Manufacturing CO. Ltd (TSM). TSM is second only to Intel in terms of the scale of their operation and the revenue generated.

As it stands, the shortage is set to be a multi-billion-dollar hammer blow to multiple industries, but especially the automotive industry.

2. Origins and Development of the Chip Shortage

The Pandemic Begins

Manufacturing of these semiconductor chips happens mostly in Japan, Taiwan, mainland China and also in the US and Europe. The trouble first started back in March 2020 when the impact of the COVID-19 pandemic started to force factories in Asia to close down, thus creating a backlog of existing orders, with more pouring in from around the world. As the pandemic spread further, the rest of the world’s economies started to shut down and recession began.

The automotive industry is no stranger to recession. Through the 20th century and early 21st century, car companies have learned through many harsh lessons the need to be pragmatic. So, the car companies cancelled their orders for parts with chips, believing that the pandemic-led recession would force demand to plummet. They were bracing for a real nosedive in business. The drop-off in trade did occur at first, but then things changed.

Most recent car models contain up to 1,400 chips in total, but there’s no doubt that this number will continue to increase as more car makers make the shift to electric cars.

Demand Rebounds, but Production Does Not

Factories steadily started to reopen, and to the surprise (and odd chagrin) of many automakers, demand for new vehicles actually started to ramp up much faster than anyone thought possible. Car makers were also developing cars of increasing sophistication, including new electric cars, all of which needed many more chips than previous models.

While the demand from car companies surged upward, the production capacity of the few main Asia-Pacific-based suppliers did not. The supply situation was further exacerbated when one Japanese supplier, Renesas Electronics, had a disastrous fire at their Naka plant, just to the northeast of Tokyo. It took four weeks to get any of the production lines restarted, and even then they of course weren’t working to full capacity.

When you combine the initial spark of COVID-19 with the fact that first all the chip manufacturers and then all the car companies went offline for a time around the same time, and the fact that demand in the automotive sector surged beyond all expectations when factories started to reopen, it created the perfect storm of scarcity. In fact, instead of COVID-19 shutting down factories in the US and beyond, it is now the chip shortage that threatens workers’ livelihoods and national production capabilities.

Both Ford and GM have been closing or partly closing down production across the US. For example, Ford announced on June 30 that they would be closing their truck plant in Kansas City for 2 weeks in July. GM had four plants in the US severely idled by the crisis, which it was only able to contemplate restarting at any capacity from the start of June.

So, how do things stand right now?

3. Current Status of the Chip Shortage

Continued Closures and Shutdowns

At the time of writing today’s blog, the latest news is still looking grim on the chip shortage matter. German auto giants Daimler and BMW have been forced to slow production even as demand for their cars is recovering. According to Reuters, Daimler has a very bleak outlook when it comes to the shortage, believing that it will drag on into 2022. Having said that, they are yet to alter their outlook on their overall profit margin by the end of the year.

GM confirmed that they will have to cease most North American production of their pickup trucks because of the ongoing chip shortage. Plants in Michigan, Indiana, and Mexico producing the Chevy Silverado and GMC Sierra trucks are to experience severe cuts in production.

A Heavy Price to Pay

Expert predictions out there right now estimate that the total cost to the auto industry of this chip shortage could be in the region of $110 billion. That’s a figure that consulting firm AlixPartners has come up with in spring 2021. After the tumultuous year of 2020, this is obviously incredibly disturbing and unwelcome news in 2021. Just as the companies were regaining hope based on that surge in demand, they are hit with a secondary crisis which, while connected to the first, presents all kinds of different problems for the industry.

Worsening Predictions

Early in 2021 the prognosis of the crisis was quite dire, but as factories reopened it was hoped that the crisis would simply right itself after the bottleneck was cleared. The problem now is that that initial spike in demand that initially worsened the crisis already created by shutdown factories restarting to catch up on previous orders turned into an ongoing wave of demand that still shows no signs of letting up.

The fact is that the prediction of it costing $110 billion that came from AlixPartners in May 2021 actually represents an 81.5% increase on the initial forecast made back in January that the shortage would only cost $60.6 billion. We used the word “only,” in a relative sense, of course.

In January it was to cost $60.6 billion, by May that had risen to $110 billion, so with demand continuing to outstrip production; Renesas still getting back on its feet; Ford, GM and others shutting down production even with growing lists of orders building up, the situation appears to be set to get worse before it gets any better.

4. Implications for the Future of the Auto Industry

Vehicle Delays

The first and most immediate impact is going to be late deliveries of models in the 2022 model year, and possibly even the 2023 model year. Already production for 2021 cars has been so hit that backlogs already exist. Don’t forget that companies like Tesla had a backlog in their production even before the semiconductor crisis kicked in. Now the disease has spread and it is affecting every major player around the world.

Delays are bad for a number of reasons, but perhaps the saving grace for many automakers is that no one company is especially better or worse off than any other. This is something of a “we’re all in it together” type of crisis. If you’re in the boardroom of Ford, for instance, you’re undoubtedly worried about the future, but you at least know that over in GM, Daimler, VW and other major global players, they’re all facing the same problems.

Financial Losses

Another obvious and immediate impact of the crisis will surely be financial losses. As we mentioned above, the figure from AlixPartners giving projected losses to the automotive industry has already shifted drastically upwards by more than 80 percent between January and May 2021.

All of this could mean huge costs either in unusable product that is forced to the scrap heap, or large financial holes left by too much capital being invested in stock that can’t yet be sold because it’s not finished. Will there have to be government bailouts considered to help the industry? GM’s CEO Mary Barra has already said that the crisis could cost the company as much as $2 billion in lost earnings in 2021

Perhaps the most frustrating thing for the OEMs in question is that these losses are not caused by their own failures to market their vehicles or win market demand as has happened to some car makers in the past, but rather the shortage of a key component that is quite out of their control. They have customers, demand, and orders but no way to supply it. These are arguably the most painful of all financial losses.

Increasing Prices

Another inevitable result of the chip shortage is a huge increase in the sticker prices of cars. It’s basic economics: demand is high but supply is low, which is boosting up the price of existing stock. The Alliance for Auto Innovation is a trade group that represents many automotive OEMs and has claimed that as many as 1.28 million fewer cars will be produced in the US as a direct result of the shortage. None of this will help the increasing prices of existing stock.

In June 2021, the average list pricing for a new vehicle was sitting at $40,566 according to Michelle Krebs, an analyst at Autotrader. That was the first week in June and it represented a $200 increase from the final week of May. It was 5.5 percent above the same point in 2020, and 10.3 percent higher than that of pre-pandemic levels in 2019.

The story is the same even for pre-owned cars because the entire crisis has manufactured a sub-crisis in the form of a shortage of used car stock. Autotrader’s Michelle Krebs again pointed to the fact that the average listing was $23,786 for a pre-owned vehicle in the first week of June, which showed an increase of $340 from the previous week. In all, a used car in 2021 is about 22 percent more expensive than it was either in 2020 or 2019.

Supply Chain

One final implication of this entire crisis is what happens to the global supply chain. Before the pandemic struck, it seemed most were happy with the arrangement that the world would rely on mainland China, Taiwan and Japan to handle most of the work producing chips that would be used in car making in countries all over the world. Now the industry is reeling from that reality and the world is reflecting on the broader problem of over-relying on industry so focused in one part of the world.

Does this mean therefore that a new market and appetite for domestic production of chips might happen in the United States? The same discussion is happening for other products like medical equipment and protective medical gear. Why shouldn’t it also happen in a keystone industry like the automotive sector?

Conclusion: A Crisis Still in Motion

The bad news is that Daimler’s prediction on the crisis dragging into 2022 is probably accurate when you look at the various factors. Renesas is recovering from its fire, but the demand is showing no sign of abating, which means the industry will have the devil of a time catching up. For now, it looks like this semiconductor shortage is just another chapter in the wider story of the many disasters of 2020.

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