From India to China to the United States, carmakers can’t make cars – not that no one wants any, but because a more than $450 billion industry for semiconductors got blindsided. How did both sides end up here?
Over the past two weeks, automakers across the world have bemoaned the shortage of chips. Germany’s Audi, owned by Volkswagen AG, will delay making some of its high-end vehicles because of what Chief Executive Officer Markus Duesmann called a “massive” shortfall in an interview with the Financial Times. The firm has furloughed over 10,000 workers and reined in production.
That’s a further blow to an industry reeling from Covid-19-induced shutdowns and a global market that had already been struggling under a growing regulatory push toward greener cars and the technology to keep up with the future of mobility. Companies appear to have been off in their calculations that traditional car production was all but coming to a halt, and that new-era vehicles were almost here.
In reality, talk of the death of the conventional auto industry has been premature. So were prospects around the technology upgrade that’s been under way. Yes, demand has been down and slowing, but we’ve been hovering around “peak auto” for a while, with global sales of 70 million to 80 million a year.
They fell 15% to 66.8 million in 2020. But the expected onslaught of new-technology vehicles hasn’t been as severe as the hype. Announcements of billions of dollars of investment covering electric to hydrogen and autonomous systems would have you believe that we’ve entered a new era of driving — or of being driven around. Yet electric and autonomous vehicles still account for only around 4% of all sales.
There’s also an equipment shortage, so foundries that make wafers typically suited for broad-based auto usage have limited capacity.`
Misjudging expectations means that companies ended up effectively shelving too early their investment in the more mundane chips that help steer, brake and push up windows they actually need. Meanwhile, chipmakers aren’t producing enough of them and have put money in higher-margin businesses. One result is that we’re clearly at an imbalance of supply and demand.Consider the number and types of semiconductor chips that go into a car. Demand isn’t just about the number of automobiles, but how many chips each one needs. Electronic parts and components account for 40% of the cost of a new, internal combustion engine car, up from 18% in 2000. That portion will continue to rise. It’s becoming a problem across the board, and not just for higher-end models. India’s carmakers association has complained of a shortage, and many vehicles there are relatively less sophisticated given pricing considerations.
So there was always going to be some sort of demand, whether you argued that more or fewer people would be driving. Automotive electronics were expected to be the fastest-growing markets in the semiconductor industry, accounting for around 12% of sales revenue by 2022, according to an April 2019 Deloitte report.
The 2022 model year is expected to be a key one. Credits that many automakers accumulated to meet greenhouse gas emission rules will expire at the end of the 2021 model year. More compliant vehicles will be needed, and electrics and hybrids use twice the semiconductor content as traditional models, according to a PriceWaterhouseCoopers LLP report.
On the supply side, the concern was more around keeping up with technology. In October 2019, the likes of Samsung Electronics Co. and SK Hynix Inc. were contending with potential overproduction issues of certain types of chips. A year earlier, Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, had sounded concerns about oversupply in 28 nanometer nodes – in demand for higher-end car features at the time – as its other customers migrated to more advanced chipsets.
Part of the issue is that there’s no fast substitute. Customers usually put orders in eight to 10 weeks ahead, but lead times have gotten much longer since the Covid-19 outbreak. Carmakers in China, for instance, don’t have more than a few weeks of supply on hand in keeping with lean, cost-friendly manufacturing operations. There’s also an equipment shortage, so foundries that make wafers typically suited for broad-based auto usage have limited capacity.
Chipmakers’ cycles – from development to certification — are long. Keeping track of and aligning with shifts in auto markets is difficult. The pandemic hasn’t made that any easier. It seems that none of the players are quite in sync. The supply-demand balance is far too delicate. Even if consumer electronics are sucking up the chip supply, with everyone suddenly playing a lot more video games or increasing use of personal computers, manufacturers shouldn’t be disabled from making cars.
Everyone’s math ought to add up better than this.
