Out of the Frying Pan and Into the Fire – Semiconductor Supply Chain Crisis set to Disrupt Automotive Market Through 2021

The automotive industry is in the midst of a semiconductor supply crisis, with April 2021 seeing many original equipment manufacturers (OEMs) continuing to halt vehicle production over a shortage of key semiconductor components. At the heart of the crisis is a weakness in the automotive industry’s procurement processes, exposed by the sudden demand contraction brought on by the COVID-19 crisis in 2020.

At the onset of the pandemic, automotive OEMs across the world cut production—idling plants and cancelling shifts as consumer demand ground to a halt in 1H 2020. With plants and machinery idle, OEMs also cancelled requests for quotations (RFQs) and orders for many components, including semiconductors. The biggest factor driving the contraction demand was revealed to be the complete disruption of the bricks and mortar retail environment—the lockdown effect becoming apparent in the new vehicle sales rebound that coincided with the reopening of dealerships in Europe and North America. Indeed, the new vehicle sales market ultimately performed better than expected, contracting by “only” around 15% globally.

However, what should have been welcome news to automakers ultimately unmasked a significant supply disruption. As OEMs looked to increase production to meet the rapidly recovering demand, they found that semiconductor vendors were not able to rapidly fulfill orders. This inelasticity to automotive demand was a result of actions taken by semiconductor manufacturers to navigate the COVID crisis, compensating for a fall in automotive business by retargeting their wafer fab capacity to satisfy a PC market revitalized by widespread working-from-home. Automakers are learning a difficult lesson concerning just-in-time delivery practices, and the ramifications of abruptly cancelling and then re-ordering semiconductors, given that the complex manufacturing of semiconductors naturally implies a slow ramp up.

Finally, this inherent supply chain weakness is being further exacerbate by additional external shocks, including fires at AKM’s and Renesas’ semiconductor plants in Japan, and extreme cold weather in Texas, USA in 1H 2021.

Automaker response to semiconductor shortages has been to cease vehicle production, rather than attempting to ship vehicles with lower silicon density, for example by shipping vehicles without certain technology features. This means that automotive suppliers are not only exposed to the risk of semiconductor shortages in their own domain, but also to the risk of shortages of semiconductors in other domains. Below is a summary of major announcements by automakers regarding the impact of semiconductor shortages on their production:

• Ford: Ford has cut production globally in response to the semiconductor shortage. In May 2021, Ford shortened the working hours of 15,000 workers in Cologne for stretches in May, June, and July. This follows earlier production cuts in US plants (Chicago, Flat Rock, Michigan, Kansas City, and Ohio). In Q1 2021, production volumes dropped by 17%, a reduction of 200,000 vehicles.
• GM: In April 2021, GM announced further halts to production lines in Tennesse, Michigan, Mexico, and extended production halts Kansas, Ontario, and an additional Michigan factory. Models effected include the Chevrolet Malibu, Cadillac XT4/5/6, and GMC Acadia
• Volkswagen: VW was among the first OEMs to warn of a semiconductor supply chain crisis, anticipating a fall of 100,000 in Q1 2021, warning that it would not be possible to account for the losses through increased production throughout the rest of 2021. In May 2021, VW announced a further idling of the Chattanooga plant.
• Hyundai: Production at the Asan factory in South Korea has been interrupted, resulting in a drop in production of over 10,000 vehicles.
• Nissan: Nissan has furloughed 800 staff at their plant in Sunderland, UK. The idling of the Kyushu plant in May 2021 will impact production of the Serena and X-Trail. Shifts have been suspended at the Oppama plant.
• Daimler: Daimler has idled production at two German plants, reducing the working hours of 18,500 employees. Impacted models include the GLC and EQC.
• Toyota: Toyota better anticipated the semiconductor supply shortage, stockpiling four months’ supply of semiconductors to ensure continued manufacturing.

Overall, the automotive industry is set to lose millions of vehicle sales due to semiconductor shortages, further compounding the losses caused by demand contraction in 2020.

Deeper Supply Chain Visibility and Stockpiling: Toyota has been the standout automaker throughout the crisis, benefiting from an overhaul of their supply chain monitoring conducted in the wake of the Japanese 2011 Tsunami. Toyota is more proactive in communicating with their supply chain beyond the Tier 1 supplier, anticipating future shortages in components and proactively stockpiling. While most OEMs rely heavily on just-in-time delivery, Toyota adopts a more flexible approach, with the value of their inventory doubling between 2011 and 2021. In order to imitate Toyota’s success, other OEMs must improve their communication with and monitoring of component supplier beyond the Tier 1 level, and must be flexible in supplementing just-in-time delivery with more inventory in order to add resiliency

Traditionally, automakers have depended upon a network of suppliers, the vast majority of which served the automotive market specifically. This is not the case with semiconductor companies, which serve multiple end markets, and which do not respond only to signals from automakers. Automakers must adjust their visibility and communication with semiconductor suppliers to reflect the fact that these are essential component suppliers, providing key components in telematics, infotainment, EVs, and ADAS, but which serve multiple additional markets. Many of these markets deliver a far more attractive margin to semiconductor vendors than the highly cost-sensitive automotive industry.

Flexible Manufacturing: In the short term, OEMs are prioritizing manufacture of their most popular models—redirecting scarce semiconductors to maintain production of top revenue-generating models. Preproduction of vehicles and other components ahead of semiconductor deliveries can also help to reduce time to inventory.

Reshoring: Given the status of the automotive industry as a large employer of skilled and organized labour, the impact of semiconductor shortage on automotive production has attracted considerable government interest. As semiconductor manufacturing is a highly automated and integrated process, it is not infeasible that semiconductor manufacturing could move closer to the point of consumption. However, any expansion of fab capacity, regardless of location, will take 2 to 3 years to get capacity rolling. High profile announcements on semi-fab reshoring are not a solution to the automotive industry’s immediate problem, but could reduce the industry’s exposure to localized disruption in the longer term.