Automotive manufacturers, like their high-tech compatriots, are dealing with a serious shortage of semiconductors that is set to last into the second half of this year — and possibly beyond. But instead of just a short-term reaction, this disruption needs to spur a longer-term and more collaborative response within the industry.
The impact of the crisis is significant. Leading OEMs such as Toyota, Ford, Volkswagen and Honda have been forced to halt production temporarily at several plants around the world. Lead times for some chips have tripled to as much as 40 weeks. And prices have risen by up to 15%. Forecasters reckon that output of more than 1.3 million vehicles could be lost in 2021 as a direct result.
Several factors explain the shortage of chips, which control everything from engines and driver safety systems to big-screen infotainment. They include:
- Reduced production by automotive chip makers last year as a result of COVID-19 induced shutdowns and a slump in demand for new cars and trucks.
- A faster-than-expected rebound in global vehicle sales in the latter part of 2020 and into 2021.
- Surging sales of the latest 5G smartphones, laptops and the new generation of PlayStation and Xbox gaming consoles, which have sucked up spare capacity.
- Trade restrictions imposed by the Trump administration on Huawei and top Chinese chip maker Semiconductor Manufacturing International Corporation (SMIC).
The auto industry has faced shortages of microchips before — notably, following the major earthquakes in Japan in 2011 and 2016. But the disruption this time is magnified because more chips are required for each vehicle that rolls off the assembly line, and because the supply chain has become more concentrated.
Auto OEMs don’t typically buy semiconductors directly; instead, they purchase subassemblies from Tier-1 suppliers who, in turn, buy from specialist automotive chip makers. In recent years, these Tier-2 firms have increasingly turned to contract manufacturers, because of the high capital costs involved in opening new wafer fabrication plants (“fabs”).
The Tier-3 level of this ecosystem (see graphic below) is dominated by Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker, which produces around 70% of automotive microcontrollers, according to IHS Markit. However, automotive accounts for only 4% of TSMC’s annual revenues, compared with 49% for smartphones and 30% for PCs, tablets, servers, base stations, games consoles and other high-tech products.
Although TSMC says it will invest a massive $28 billion in new capacity in 2021, it will be several years before this is fully online. In the meantime, the auto industry is scrambling to find short-term solutions. These include lobbying the Taiwanese government to put pressure on TSMC to prioritize supplies to the sector.
Deep Structural Changes
Like previous supply disruptions, this one will gradually dissipate as demand from customers in other sectors softens and more capacity becomes available. However, it would be wrong for automotive procurement and supply chain leaders to take only a reactive, short-term approach to this latest crisis. It highlights deep structural changes in the auto sector that must be addressed through longer-term thinking and strategic investments.
The global automotive semiconductor market is forecast to grow by around 7% annually over the next few years. Whizzy new features combined with accelerating demand for hybrid and all-electric vehicles will only increase the volume and sophistication of chips required. This, in turn, will increase the dependence of automakers on a largely Asia-based electronics supply chain — one in which they are relatively small players.
This scenario, combined with the shift of power to ever-larger Tier-1 suppliers, means that auto OEMs cannot simply dictate terms as they did in the past. Supplier relations may have improved somewhat, but brand owners will need to take collaboration to a whole new level if they are to successfully navigate their way through the fundamental transformation of their industry.
Gartner research among more than 1,300 supply chain professionals in late 2020 found that automotive was the sector least likely to be investing in more collaborative relationships, both upstream and downstream, to achieve greater resilience and agility (see chart).
Instead of just seeking to lock in their own supply, OEMs need to make bold moves that build trust and improve coordination across the entire supply network. These include:
- Moving away from the current short-term sourcing cycle for semiconductors and locking in capacity via longer-term contracts. Direct volume commitments from OEMs and framework contracts to support their model platforms through Tier-1 suppliers will drive confidence in in-house capacity investments at Tier 2.
- Developing cooperative arrangements with rival OEMs and key suppliers to pool demand and collectively seeking more attention from the big chip manufacturers.
- Working with industry bodies, government agencies and key suppliers to attract new entrants into the auto sector, especially outside the Asia-Pacific region.
The hierarchical and adversarial history of the auto industry sits uncomfortably with the need to nurture an expanded ecosystem for semiconductors, as well as other key components such as batteries that will power the next generation of products.
The big question is: can the automotive giants raise their game or will they, like their peers in other traditional sectors, fall victim to nimble new innovators such as Tesla in this high-tech future?
Vice President Analyst
Gartner Supply Chain