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The Auto Sector After the Microchip Shortage – a Long-term View

By Pedro Pacheco | June 28, 2021 | 0 Comments

The consequences of the microchip shortage are well known and not much can be done to solve the situation in the short term. As some see this shortage as a major hindering factor for the automotive industry in the coming months, there are high chances the long-term consequences will be far more impactful than what we will see this year.

At the same time, the automotive industry is now largely in flux. The CASE transformation (connected, autonomous, shared and electric) has never been more disruptive than now. In addition, the main automotive companies are now undergoing their deepest transformation ever since their creation, with the purpose of becoming technology companies, with strong technology and software in-house capabilities. Their aim is to maximize the role of software and digital user experience as a main future driver for profitability.

Having the current situation in mind, the main automakers will learn lessons from the current situation that will allow them to tackle the future in a different way. Today’s automotive value chain is very complex and with several limitations concerning the communication and control across several different tears of suppliers. For instance, chip makers are traditionally tier 3 or tier 4 suppliers to automakers, which means it usually takes a while until they adapt to the changes affecting the automotive market demand. This is the reason why the automotive sector wants to build a connected open data supply chain ecosystem. Initiatives like, for instance, CATENA-X, are a good examples of this concept. The aim is to insure an open exchange of information between OEMs and suppliers with the purpose of enhancing supply chain efficiency overall.

On a completely different angle, automotive companies have already started to build more control on the software that is incorporated into their products, namely by strengthening their internal software development organizations. This is vital, as software will be a main driver for future profit. Under the concept of software-defined vehicle (where the vehicle features are essentially defined or redefined by software updates), hardware should follow software. This means that vehicles’ hardware requirements should be defined in a way that they don’t represent a limitation to the ability of monetizing software across a large part of the vehicle’s lifetime. Inherently, this means also taking a tighter control over hardware. Having OEMs building their own chips would not be a possibility due to their very low values in comparison with the overall market. However, it is highly likely some automakers will take steps to design their own microchips, also to make sure these can better respond their needs. Tesla’s example, as it designed the its Full Self Drive microchip and commissioned contract manufacturing to Samsung, is one of the models being considered by automakers. Herbert DIess, CEO of Volkswagen, has recently announced on his LinkedIn page his company is deploying the ‘North Star’ initiative with the purpose of overhauling the area of purchasing. According to him, “The aspiration is not anymore just buying at best cost, but to influence the design of our value chains and the content of our products”.

Going even further, automakers may also secure microchip production capacity. As they established more direct relationships with microchip makers (bypassing several supplier layers), this enables OEMs to secure microchip production capacity and also to have a tighter control of the manufacturing requirements. It’s likely OEMs start this new type of relationship with chipmakers with the most important chips. As the most advanced vehicles transition towards a centralized compute architecture, this means the high-performance computers of this new architecture could soon be designed by OEMs and commissioned directly to chipmakers. Giving the critical importance of these particular chips, automakers will focus efforts in order to build the greatest possible competitive advantage in these.

In a nutshell, disruptive changes hardly ever happen for a single reason. There was major disruptive transformation already taking place in the automotive sector. However, the lessons learned from the microchip shortage will push automakers to go even farther in their plans to become a tech company. This means securing a more direct control over the microchips as well as other components that are the most critical to the success of their vehicles.

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