It’s impossible to ignore the global semiconductor shortage has been in the news lately. And it probably won’t be going away any time soon. The impact on automakers, and ripple effect on their suppliers, is significant. A recent case in point is this June 30 article on production slowdowns at Ford plants:
The problem seems simple on the surface – order more semiconductors in an effort to increase demand and, therefore, supply. But the reality is a far more complicated situation that can’t be fixed so easily. We’ll take a closer look in this blog.
How did We get Here?
Some reasons for the shortage are directly related to the Coronavirus pandemic, but the situation is actually far more complex.
Once the pandemic caused lockdowns around the world, the demand for electronic devices, most of which use chips and semiconductors, skyrocketed. Many of us relied on the Internet for work, school, and entertainment from home, so more people needed laptops and tablets and all the extras associated with them: keyboards, monitors, mice, routers, and other devices to stay connected and productive.
Some also took advantage of time at home to do home improvement projects, including replacing appliances. Most of these also rely on chips and semiconductors, and that added to the spike in demand.
At the same time the US government has placed tariffs on Chinese semiconductors, which makes it challenging for companies to buy more. Add to that the global shipping and transportation disruptions due to the pandemic and worker shortages around the world. And finally, recent severe weather, drought, and factory fires hampered the production side of the equation.
So why not just make more at US facilities? According to Reuters, “despite existing domestic manufacturing, U.S. demand for semiconductors is highly dependent on foreign suppliers, especially those located in Taiwan.”
And since it’s extremely expensive and time-consuming to bring new facilities online, building a new factory and making more isn’t really an option, especially if the semiconductors needed most are not considered cutting edge technology, which is the case in most automotive applications – established technology doesn’t drive new facility growth.
In other words, ramping up production might ease the shortage for some products but not everything because semiconductors are highly specialized to certain products.
Where do Automakers Fit in All of this?
Again, it’s complicated. When demand for new vehicles slows, automakers cut their losses by reducing production, which means they stop ordering parts and materials orders to avoid having a surplus to pay for and store. So, “when the Covid-19 pandemic caused a precipitous drop in vehicle sales in spring 2020, automakers cut their orders of all parts and materials — including the chips needed for functions ranging from touchscreen displays to collision-avoidance systems. Then in the third quarter, when demand for passenger vehicles rebounded, chip manufacturers were already committed to supplying their big customers in consumer electronics and IT,” according to the Harvard Business Review.
Compounding this issue is the “just in time” (JIT) operating principle. In “normal” times, it boosts plant efficiency and productivity to have just enough stock on hand at any given time instead of buying and holding surplus in storage “just in case.” But in this case it undermined automakers’ abilities to cope with the shortage.
JIT works well when the supply chain is reliable and flowing smoothly, but throw in a global workforce shortage that cuts production of parts and raw materials, and all of a sudden there are few options to order more. If everyone keeps minimal backstock, no one has extra for an emergency.
When business takes a downturn, pivoting is one way to stay afloat in a crisis. Reuters reports, “many semiconductor contract foundries switched from making ‘mature’ chips for the auto industry to producing more technologically advanced ‘emerging’ chips for the consumer electronics industry (e.g., 5G), which demand higher prices.”
Why is it so Hard to Increase Production?
More complexity. Despite the ongoing advances in “smart” and connected vehicles, expansion of advanced driver assistance systems (ADAS), most cars and trucks rely on well-established chip and semiconductor technology.
Automotive chip design is a slow process because of the high safety standards required. This involves initial design (and successive iterations) and verification for reliability and “torture testing” for heat exposure and other environmental conditions. What’s more, chips must be qualified for specific OEMS. Then there’s manufacturing, technical cleanliness and packaging requirements, and overseas shipping.
Like any other company, semiconductor foundries (or fabs as they’re often called) focus time and money on the newest designs that will be most profitable. For most, pivoting to auto semiconductors would require investing in older equipment to make the older chips vehicles use. It’s not an attractive option because they would have to buy new equipment and requalify their factory to auto OEM standards and it could be a couple of years to be running at full capacity. And because demand will eventually level out as foreign auto chip suppliers come back online, most domestic foundries conclude it’s not worth the time and money to make the change – especially when there’s high demand for the chips they can already produce.
“As carmakers increasingly prioritize electric vehicles, cars are becoming electronic devices. This means the automotive industry now must face the competing demands of all other industries, including those in electronics and those adding internet connectivity to their products,” according to Harvard Business Review.
The Path Ahead
The semiconductor shortage has a trickle-down effect on other OEM suppliers. OESA’s Automotive Supplier Barometer for Q2 of 2021 says, ”over the past three months, 42 percent of suppliers have had a significant increase in sub-tier supplier distress, up from 34 percent over the past year. Production shutdowns due to supply chain shortages, and suppliers’ ability to fulfill volumes are the top threats to the 12 month outlook; however, suppliers are faithful in the strength of the economy and vehicle sales.”
In the meantime, many suppliers are coming up with temporary strategies to stay in the manufacturing game:
- Supply other parts to manufacturers who are themselves pivoting temporarily
- Developing new products for new markets
- Investing time in innovation
Researchers at McKinsey have found “chip capacity won’t catch up with demand in the short term for the auto industry. That is primarily because of the continued increases in volume and sophistication levels of the chips needed to power new technologies, such as advanced driver-assistance systems and autonomous driving.”
They stress that going forward, manufacturers need to demand more transparency into the actual global demand for components and to closely examine efficacy of JIT and low stock practices. Another possible option, according to McKinsey, is “replacing back-ordered components with similar but more feature-rich units (for example, swapping in chips with more memory) and using consumer-grade chip sets that receive additional quality tests.”
At CEP Technologies, we can help make sure your product is high-quality, on time, and ready to supply your customers. If you’re in the midst of a pivot or are looking to diversity your products, please talk to us. We have in-house expertise and stamping capabilities you can rely on.