An in-depth look at the global shortage of semiconductor chips
Although it looks like the world has finally got the upper hand fighting against the COVID-19, it is obvious that pandemic will have profound effects on the global economy and industry. At first, the companies were concerned about their workers’ health and safety, but very soon, the materials, parts, and component supply lines were interrupted, causing delays in production plans. Amongst the major industries affected by this, the automotive sector probably took the biggest hit. At the moment, all major car companies are in the midst of a significant semiconductor chip shortage which cripples the production plans, costing billions of dollars and forces the manufacturers to consider different strategies.
Global Conditions Preceding The Chip Shortage
When the pandemic broke out in early 2020, most car companies shut down their production lines for weeks or even months, protecting their workers and obeying national quarantine laws. At that time, demand for new vehicles plumbed, and numbers of new cars sold in April of 2020 compared to the same month of 2019 were slashed by 47% on average. Such sharp decline forced car companies and dealers into “safe mode.” The feeling of uncertainty throughout the industry meant that new car releases were canceled or postponed, production targets were abandoned, and all manufacturing plans were put on hold.
“As with many other industries, the shortage is of great importance for the car industry. More significant than most people can imagine.”
What Caused The Chip Shortage?
However, the car companies forgot that they are highly dependable on parts and components suppliers, which were also affected by the pandemic. When the assembly lines stopped, and car companies decided to wait, thousands of automotive suppliers were faced with order cancelation and unsold stock. Among those suppliers, numerous factories from Asia produced electronic components and, most importantly, semiconductor chips. Faced with the lack of demand and uncertain future of their products, those factories decided to switch to producing consumer electronics. From the business perspective, that was an intelligent decision since the pandemic and global quarantine resulted in an astonishing rise in sales of smartphones, computers, tablets, and TVs. For most of 2020, people around the world needed entertainment more than they needed a new car. Although there is a significant difference between chips designed for use in vehicles and chips designed to be used in a gaming console, the electronic companies managed to switch in a remarkably short time and continue production with minimal delays. More importantly, change in the products was followed with lucrative and long-term contracts with the world’s leading tech companies, which replaced automotive contracts that were canceled or put on hold.
The Effects Of The Shortage
After the initial lockdown, which almost all companies decided to impose, the later part of 2020 proved to be much more promising. The sales numbers during the fall of 2020 were even better than the same period of 2019. The production was back to an average level, and the process was again safe with necessary health regulations. However, the cars produced in that period were assembled with the parts and component delivered before the pandemic started, which meant that car companies would soon run out of semiconductor chips. That happened in 2021, putting the car companies in a very awkward and problematic situation. The demand for new vehicles is enormous, but car companies simply cannot produce any vehicles due to chip shortages.
Why Are The Chips So Important?
The importance of chips in the car industry is significantly greater than most people can imagine. First, the chips control every electronic system in the vehicle, from engine control modules to ABS braking and infotainment system. In modern vehicles, there isn’t a single process that isn’t controlled or monitored by a computer chip. This means that the average vehicle can have between 2,500 to 3,000 various chips installed. If we know that in 2019, all car companies combined produced astonishing 78 million vehicles, the number of chips needed is measured in billions. Even though the electronic factories didn’t completely stop making the automotive chips, the production is significantly reduced, and the shortage was inevitable.
Predictions And Plans
As expected, the most prominent car companies are the most hit by the shortage, and despite high demand and reduced COVID-19 risk, companies decided to stop production for two to three weeks due to chip shortage. Of course, on such enormous scale every delay is very costly, and the expected costs throughout the industry are extremely high. Several consulting firms expect that the overall cost of chip shortage will exceed €100 billion in revenue for all global car manufacturers. Some companies even considered removing some optional extras from the cars like navigation systems of big displays to reduce the number of chips needed for production.
The representatives of electronic companies are optimistic and have already invested in production capacities which should be up and running in the following months. Most of them state that they will manage to satisfy the demand in the second half of 2021, which would mean that the car production will be stabilized by the end of this year. However, most CEOs of car companies are less enthusiastic, believing that the chip shortage will be an issue in 2022. Experts from IBM are the most cautious and predict that the first signs of stable chip supply will be in 2023, two years from now. Pessimistic predicaments like those are primarily based on the fact that even though the lockdown has passed, the demand for consumer electronics isn’t weakening and that chip factories need to double the production capacity in order to cover appliances and automotive production.
Geoffrey Heyninck
Chief Executive Officer
Conclusion
When global pandemic started, most analysts feared recession and a low demand. However as the economy remained stable, it’s the manufacturers who cannot supply due to the global shortage in semiconductor chips. Therefore, they will have to rely on solid partnerships to stay agile.
Articles associés.
01 - 06 - 2022
The Effects Of The Russo-Ukrainian War On The International Car Trade
In this modern world, the principles of interconnection are best observed in our economy. There is no significant change in the world that is not affecting the economy and vice versa. We directly experienced this concept during the COVID-19 period, these past two years. But just as the world started to recover, another crisis erupted. This time it was Russian aggression on Ukraine, which began in late February of 2022. Although Russian officials call it a “special military operation”, it has turned into an all-out war between two major European countries. The war has already displaced millions of people and caused billions of dollars in damage. Seting aside the political debate, let us observe the profound impact of this conflict on one of the biggest industries in the world – the automotive industry and car trade.
SALES
23 - 06 - 2022
Two Years Into Semiconductor Shortage: What’s The Current Status?
These past two years have changed people’s lives profoundly and also changed the way we work, travel, and shop. As a result, the pandemic ravaged various industries across the globe. The assessment is that over 190 different sectors have been hit, among which the car industry suffered one of the most considerable losses. The reduced sales and significantly lower demand were not the only problems the car industry faced: eventually, the shortage of semiconductor chips significantly reduced the ability to produce vehicles. When the pandemic hit and people around the world had to reside at home, the demand for products such as cars dropped, while the demand for consumer electronics grew enormously. Hence, the factories producing semiconductor chips quickly divided their attention to these manufacturers. Eventually, this shift and other events involving the semiconductor factories in Asia left many industries without these crucial components. As for the car industry: cars could not be completed and therefore sold, which resulted in a huge gap between the production capacity and the increasing demand when the lockdowns subsided. For now, the question lingers – What is the status of this issue? Has it been resolved?
SALES
DEALERSHIPS
10 - 08 - 2022
The Magnesium Shortage: A Long-Term Threat Or A Temporary Hiccup?
The 2020s will be remembered as one of the most turbulent periods for the global car industry. First, we had a significant technology shift and massive push towards electric and plug-in hybrid vehicles that shook the foundations of the industry as we know it. Furthermore, the Covid-19 pandemic threatened to shut down the market and caused numerous shortages and supply delays. Recently, the Russo-Ukrainian war and Western sanctions will significantly lower the global production output, especially in Europe. Unfortunately, this is not the end of the car industry’s problems. The latest issue which affects car manufacturing comes in the form of a magnesium shortage. But is this just a temporary problem that could disappear as fast as it came? Or are we looking at a problem of the same proportion as the semiconductor chip shortage?
SALES
Acheter
Découvrez une nouvelle norme dans l'achat de voitures. Notre expertise garantit la plus haute qualité et professionnalisme, adaptés aux besoins de votre entreprise.
Vendre
Découvrez pourquoi Quadriga est le partenaire stratégique pour les fabricants, importateurs et grands groupes de concessionnaires. Nous vous aidons à accroître votre part de marché, à améliorer votre flux de trésorerie, à optimiser votre planification de production et à réduire efficacement vos surstocks.