How Covid led to a global $ 60 billion chip shortage for automakers

Automakers around the world are expected to lose billions of dollars in profits this year due to a shortage of semiconductor chips, a situation that is expected to worsen as companies battle to supply critical parts.

Consulting firm AlixPartners expects the shortage to cut revenue for the global auto industry by $ 60.6 billion this year. This conservative estimate includes the entire supply chain – from auto dealers and manufacturers to large Tier 1 suppliers and their smaller counterparts, according to Dan Hearsch, general manager of the automotive and industrial division of the New York-based company. York.

“Everyone along the supply chain is losing some of their money,” he said. “This could represent 10% of global demand this year, its impact, which is cratering the recovery. We don’t think we are exaggerating this.

General Motors expects the chip shortage to cut profits from $ 1.5 billion to $ 2 billion this year. Ford Motor said the situation could reduce profits from $ 1 billion to $ 2.5 billion in 2021. Honda Motor and Nissan Motor expect to sell 250,000 fewer cars by March due to the shortage .

Solid-state chips are extremely important components in new vehicles for areas like infotainment systems and more basic parts like power steering and brakes. Depending on the vehicle and its options, experts say a vehicle could have hundreds of semiconductors. More expensive vehicles with advanced safety and infotainment systems have much more than a base model, including different types of chips.

“I can’t really imagine anyone being spared,” Hearsch said. He said the situation could turn into a “knife battle” between companies, industries and even countries for the supply of chips, which are used in everyday consumer electronics.

One of the only outliers to date is Toyota Motor, which said Wednesday it had up to four months of chip inventory and did not immediately expect the global shortage to hit production, according to Reuters.

Tesla CFO Zachary Kirkhorn told investors on the company’s quarterly earnings call last month that the shortage as well as the shipping port’s capacity “could have a temporary impact” on the automaker. . In a public record, the company said the impact of the shortage was “still unknown,” saying any part downtime could impact production.

Automakers scramble to source chips, which take extremely long due to their complexity. The shortage is far down the supply chain, causing a ripple effect across the network.

Some automakers, like GM and Ford, have confirmed plans to partially manufacture products and store them until supplies for the vehicles are available. Others said they may look to purchase parts directly from smaller suppliers, removing much of the current supply chain.

Research firm IHS Markit predicts that 672,000 fewer vehicles will be produced in the first quarter of 2021 due to the semiconductor shortage, including 250,000 units in the world’s largest auto market, China.

Although major semiconductor suppliers such as Taiwan Semiconductor Manufacturing and United Microelectronics have announced investment plans to increase production capacity, IHS says those plans will do little to help alleviate the shortage in the near term.

“As the cause of these constraints is the result of growing OEM demand and the limited supply of semiconductors, it will only be resolved when the two forces are aligned,” said Phil Amsrud, senior analyst at IHS Markit for advanced driver assistance systems, semiconductors and components.

One of the most affected automakers is Ford. The company was forced to dramatically cut production of its F-150 pickup this week, which is critically important to the company’s bottom line. Ford said it is working closely with its suppliers to purchase the chips, which are largely unique to the pickup truck and cannot be replaced with ones from cheaper vehicles.

It’s different from rival GM of Crosstown. The Detroit-based automaker has temporarily halted production at three North American car and crossover plants at least until mid-March. The effort is aimed at prioritizing the production of its most profitable full-size pickup trucks and SUVs, according to CFO Paul Jacobson.

The global automotive industry is an extremely complex system of retailers, automakers and suppliers. The latter group includes larger suppliers such as Robert Bosch or Continental AG who purchase chips for their products from smaller, more focused chipmakers such as NXP Semiconductors or Renesas.

A fold in the supply chain at any point in the process can have a huge knock-on effect on production.

“This is a classic example of the bullwhip effect,” said Razat Gaurav, CEO of supply chain analytics and software company Llamasoft. “Small changes in demand, as they propagate further up the value chain, variability and volatility increase dramatically.”

Much of the problem starts at the bottom of the supply chain involving “wafers”. The wafers are used with the small semiconductor to create a chip that is then placed in modules for things like steering, brakes, and infotainment systems.

It takes 26 weeks to manufacture the chips before they are installed in a vehicle, according to Hau Thai-Tang, head of Ford’s product platform and operations.

The origin of the shortage dates back to the beginning of last year, when Covid caused gradual closures of vehicle assembly plants. When the facilities closed, wafer and chip suppliers diverted parts to other industries such as consumer electronics, which should not be as affected by home orders.

“These chipmakers as well as wafer makers started to redeploy their ability to love consumer electronics, which was increasing due to people working from home and virtual work models,” Thai-Tang said during an investor conference last year. “Fast forward, if you add 26 weeks to when they made these decisions, the drop or dip in supply started to hit the auto in the second half of last year, ahead of the first quarter.”

But demand for new vehicles has been more resilient than expected during the closures, especially by consumers, so the industry has recovered much faster than expected. Against this backdrop, chip vendors continued to divert resources from the automotive industry and try to catch up with demand from the automotive industry.

“There are no easy fixes,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research. “Last year we knew that once they were able to flatten the curve and put safety protocols in place, they could go back into production. This is not the case now. We have very long lead times and an increasing demand for chips.

– CNBC Lora kolodny contributed to this article.