Demand for chips, semiconductors and microcontrollers has always been ahead of supply. However, the gap widened dramatically since 2020, when the COVID pandemic forced manufacturing centres and ports to close.
The pandemic was the eye of the perfect storm acting alongside labour shortages, trade disputes and increasing demand from producers emerging processor-heavy 5G technologies combined to throw the global supply into chaos.
From medical to mobile technology, the resulting chip shortage has left almost no industry untouched—and the automotive industry has arguably taken the most brutal hit, despite accounting for just 5-10% of global semiconductor consumption.
Current estimates place the average lead time for the semiconductors integral to chip manufacture at 27 weeks. However, less conservative observers report wait times of over 70 weeks. In 2021, the global semiconductor shortage shrank the global production of passenger cars by some two million units.
Renault-Nissan-Mitsubishi Alliance, GM Motors and Jaguar Land Rover are among the manufacturers reporting decreased sales and profits for 2022 due to the shortage.
And it’s not just a profit problem: In the time it takes to prototype a new system, chips essential to the design can become unobtanium, forcing manufacturers must choose between bulk purchase up-front or the prospect of repeated R&D with new components.
In Europe and the US, governments are working to break their dependency on chips manufactured in China, Taiwan and South Korea, which account for more than 80% of global production.
In August this year, Joe Biden’s CHIPS and Science Act pledged $52bn of investment into domestic production facilities to ween the US off Asian chips, and the EU is planning a similar package worth €43bn. But it could be decades before manufacturers can benefit. In the meantime, automakers must explore other avenues.
Doom and gloom across the automotive sector haven’t been universal. In 2020—when the chip crisis was biting hard—Volkswagen reported profits of €20 billion (£16.6bn), representing an increase of 3.5% from €19.3bn (£16.1bn) in 2019, reports Autocar.
The clue to how Volkswagen achieved albeit modest growth despite the chip crisis can be found in the number of units the manufacturer sold in the first year of COVID and the chip shortage: Just 8.6 million, compared to 11 million in 2019.
By allocating more chips to luxury models with higher margins, the group increased overall revenues by 12% to €250bn (£208bn) —despite a decline in overall sales. Lamborghini, Bentley, Audi and Porsche were among other manufacturers for whom a focus on pricing gains in the luxury market resulted in a revenue boost at the onset of the crisis.
A faster and more responsive approach to dealing with the shortage is building more agile manufacturing processes that can easily handle changes in supply. This strategy allows manufacturers to buy up any available microchips and controllers and retool assembly lines to adapt accordingly.
Automakers and tech companies are also exploring ways to make available chips work harder by refining code and applying software patches.
Automakers can prioritise the allocation of scarce chips to vehicles’ most essential systems to make the most of scarce resources. And when the chips are really down, manufacturers may choose to delay the launch of non-critical features or release vehicles without them, with options to retrofit later.
When will the shortage end? It depends on who you ask. Optimistic forecasters who foresaw a two-year crisis now say 2023 could see semiconductor production back to pre-COVID capacity. However, the consensus suggests we could be in for a minimum two-year wait.
If your automotive project is held up, seek unbiased, independent advice from Dalroad’s team of expert engineers to get things moving. Contact us today.
