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The automotive industry has been experiencing major supply chain disruptions in semiconductors, which nowadays are an essential part of automotive electronics, with the shortage expected to persist for the foreseeable future. This situation translates into a large number of unsold vehicles and eventually a reduction in the top line of car producers worldwide. According to AlixPartners, a US consulting firm, the crisis in the car industry will cost £80 billion (€93.6 billion) in revenue in 2021. In volume terms that’s 3.9 million unfinished cars globally.
The crisis, in many aspects, is to a certain extent self-induced by the industry. Last year the pandemic brought car sales to a sudden halt. In Q2 of 2020, auto sales plummeted by as much as 80 per cent in Europe, 70 per cent in China, and almost 50 per cent in the United States. As a consequence, carmakers opted for prudence, and have cut back on their semiconductor orders worldwide, with semiconductor manufacturers being forced to find other avenues of sales from other sectors.
Indeed, the shift to remote working drove up the demand for personal computers, servers, and equipment for remote communications significantly and the semiconductor producers filled in the missing demand from car manufacturers without any major hurdles. During the latter half of 2020, when the automotive industry rebounded, car companies were faced with supply anomalies, as their semiconductor suppliers failed to have the necessary capacity to cater to the regained demand.
One of the reasons for the escalation of the said situation is how contracts are structured in the semiconductor industry. Typical contracts with car manufacturers tend to be much shorter than they are with other customers, such as electric appliance producers. While the former usually have contracts ranging from a few weeks to a few months, the latter tend to have longer periods, 12-month term contracts.
Moreover, the shortage was also exacerbated by geopolitical tensions when the Trump administration began regulating sales of semiconductors to Huawei and other Chinese firms. These companies started stockpiling chips that are used for smartphones and other electronic devices, thus reducing remarkably inventory levels of their suppliers.
Additionally, the automotive industry is increasingly shifting towards electric vehicles that depend extensively on semiconductor inputs. For example, a Ford Focus typically uses around 300 chips, while one of Ford’s new electric vehicles can have up to 3,000 chips.
As of August 2021, the average lead time for semiconductor orders is around 22 weeks. German manufacturer Volkswagen said that VW Polo and Vento customers are waiting for up to five months to get their hands on one of these models. UK car manufacturer Jaguar Land Rover reported that it now has 12 months of orders on 51 product lines.
Daimler’s CEO Ole Kallenius said he hopes the third quarter is the “trough” of the disruptions. “That seems to be the quarter that will be most significantly affected by this,” he said. “We hope that in the fourth quarter we will start coming back up again.”
However other sources were less optimistic. Executives at the IAA Munich auto show said that the global semiconductor shortage may not entirely go away next year and could take until 2023 to be resolved. According to McKinsey, a leading management consulting company, the situation is unlikely to resolve in the short term, as the current production capacities are already at maximum, and switching to a new plant or a new producer can take as much time as six months to a year.
McKinsey claims that longer-term solutions will need to involve different contract structures for car companies, having more binding, longer-term contracts. In addition, supply chains need to become more resilient, reconsidering at least in part just-in-time delivery. Companies also need to align with the current push by certain governments for more regionalized production to tackle the current sensitivity of supply chains.
Undoubtedly, an immediate solution is imperative to mitigate the possible consequences that the automotive industry may face in the foreseeable future. A passive path could have ultimately serious economic consequences on a broader scale. Practically speaking, Germany holds a stronghold in the automotive industry, with 18 per cent of its exports being motor vehicles, trailers, and semi-trailers. Thus the possible economic impact cannot be underestimated, also because Germany is an important contributor to the European bloc’s economic growth.
This article was issued by Tamas Jozsa, research analyst at Calamatta Cuschieri. For more information visit?www.cc.com.mt. The information, view, and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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