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Automotive Chip Shortage 2021 Explained

  • January 28, 2021

2019: A hopeful outlook for the years ahead

The third quarter of 2019 saw a grim future ahead of the automotive industry. There was a predicted market decline due to various factors, some of which are the increased demand for carpooling, more stringent requirements for sustainability, and the expensive route from combustion engines to electric batteries.

Still, automakers remained positive the industry would recover sometime in 2020-2021. Edmunds even forecasted new vehicle sales to be at $17.1M in 2020 which, given that it’s the same as in 2019, is better than a decline. Things seemed to end on a hopeful note at the end of 2019.

Then COVID ravaged the world and everything just seemed to come to a stop.

 

2020: The automotive industry and COVID-19

In the US alone, the automotive industry employed over 900,000 people. Factories either had to halt production or risk outbreaks and a bad employer reputation. Even then, the biggest blow to the industry was when China, where many global automakers sourced their parts and housed their production lines, had to completely shut down many of its manufacturing factories.

Apart from a crumbling supply chain, unemployment rates soared. The International Labor Organization estimated a worldwide loss of 160-million full-time jobs in the first quarter of 2020 and millions more in the next few quarters. A higher unemployment rate means even fewer consumers who can afford vehicles.

With auto factories either shut down or at 50% manpower, year on year auto sales crashed during the first quarter of 2020.

This economic gut punch must have frightened business leaders. At this point, decision-makers wanted to keep their businesses safe and predicted the decreased demand to last until further notice. This prediction caused automakers to lay off thousands of their employees and to decide to decrease their vehicle output, in effect slashing their demands from the semiconductor industry. 


Were automakers too pessimistic?


Everyone believed that the auto lag would persist well into 2021.

Yet, much to the surprise of industry leaders, auto sales picked up by the third quarter of 2020. It was still a huge year on year decrease, but it wasn’t as bad as everyone predicted. This unexpected demand surge led to a chip shortage in the automotive industry. Even more so because modern cars today have touch screens, multiple cameras, and entertainment features.

It began to seem like those who forecasted the downfall of the industry didn’t take into account the loss of public transport during COVID. People needed their own, fully functional, private vehicles. Private companies opted to provide shuttle services for their employees. There was a need for more vehicles because of the strict social distancing measures. Plus, people were in their homes and could easily shop and search for anything online, dream cars included.

The industry itself has been dreading a major economic slow down long before COVID-19 hit. So naturally and understandably, when disaster struck, they hit all of their brakes to prevent further impending damage. It wasn’t really a surprising move.

Economic Times noted “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… So there was always going to be some sort of demand, whether you argued that more or fewer people would be driving.

The argument does make sense when you look at it that way. A car chip shortage could, possibly, have been avoided with better planning and accounting of inventory (and a slightly more hopeful outlook).

 

Was the semiconductor industry prepared to take on the demand?

On the other hand, there was absolutely no time to rest for the electronics and semiconductor industry.


There was a brief moment of fear when COVID-19 hit. How were huge manufacturing facilities, housing thousands of employees daily, going to function? Companies were quick to strategize in maximizing health and safety protocols with as little damage as possible to the production lines. Although there was a considerable lag in output due to the decrease in manpower, the industry powered through the pandemic.

The drastic decrease in demand for chips from the auto industry led semiconductor suppliers to shift their focus to the ravaging demand for consumer electronics. Millions of people were quarantined and designated to work from home which led to an increased demand for PCs, laptops, wireless routers, and various entertainment consoles. But even these items were quite difficult to acquire. You always had to pre-order and come back to the store a few weeks later to claim your purchase. There clearly was a lag in the entire industry of electronics and chip production, so the automotive chip shortage could really have been forecasted.

ExtremeTech argued that the shortage could also have been because of “insufficient investment in 200mm wafers”. Although the 300mm wafers were supposed to dominate the market, the 200mm wafers found loyalists due to its affordability. This demonstrates the industry’s focus on cost-efficiency and its seemingly hesitant take on modern innovation.

Despite the lag in production, the demand surge for chips continued. The Semiconductor Industry Association (SIA) reported that global semiconductor sales went up by 11% in October 2020, which is a 6% year-on-year increase.

 

Will the industry be able to close the supply-demand gap?

Maintaining the delicate balance between supply and demand is tricky but completely possible. There are many supply chain solutions that could help in rebalancing the market.

Automakers are giving their best efforts to level customers’ expectations: Some cars won’t be available until later this year, but it will be worth the wait (or so they say). Automotive companies are also scouring global supply chains for the possible availability of various semiconductor and electronic components they need. A shortage management service could make this search easier and quicker, together with much-needed quality control.

The global automotive chip shortage is expected to last well into the third quarter of 2021. By then, chipmakers are predicted to have caught up with the demand surge.

One thing is sure: Both industries need all the help they can get.