SEMICONDUCTORS The impact of semiconductor bottlenecks on the future of the automotive industry
It has been reported in recent months that the world’s largest automakers are facing a shortage of semiconductors that are vital to the production of modern connected vehicles. What impact will this development have on the automotive industry?
As car sales fell in the early months of COVID-19, so did demand for electric drive components. Chipmakers, therefore, reserved supply for consumer electronics, such as gaming devices, smartphones and tablets, as per demand.
However, the automotive industry recovered quicker than anticipated. German broadcasting company, Deutsche Welle, reports that Chinese car sales fell by only 6.8 % in 2020, following a slump of 80 % in February of the same year. This quick recovery has resulted in a bottleneck of semiconductor supplies to the automotive industry as chipmakers struggle to meet demand.
Volkswagen has said that it will produce 100,000 fewer cars in the first quarter of 2021 at sites in China, North America and Europe because of the bottleneck. Likewise, Honda and Nissan have said they would be forced to cut production, which will impact several of their best-selling models. General Motors, Daimler and Renault are also reported to be struggling with supplies.
How vulnerable is the automotive supply chain?
The automotive supply chain is particularly vulnerable at the moment. As chipmakers focus on supplying their higher-value customers in the consumer electronics industry, car parts suppliers like Continental and Bosch are struggling to supply automakers.
To provide context, Bloomberg estimates that a billion smartphones are produced every year, compared to 10 million cars, which explains chipmakers’ focus on consumer electronics.
Likewise, with an increase in remote working due to COVID-19, businesses across the globe have had to upgrade their digital infrastructure. Telecommunications companies have invested in assets like broadband, smartphones and other devices, further fuelling semiconductor demand.
And for automakers in the U.S., the problem has another angle. The country recent blacklisted dozens of Chinese tech companies to stop US technology from being used for ‘malign’ purposes. The blacklist includes leading chipmaker SMIC, based in Shanghai.
Where the biggest vulnerabilities lie
The most immediate vulnerabilities facing automakers are in lead times and cost. In an interview with the Financial Times, Continental estimated lead times of six to nine months for semiconductor supplies, which could see more automakers cut production.
And as demand increases, so will costs. According to Automotive News China, Dutch chip supplier NXP Semiconductors are increasing their prices on all products due to an increase in materials costs and a shortage of chips.
The long-term consequences in the automotive industry
Until now, the main concern over bottlenecks has centred around the demand for cobalt. The rise in the number of electric vehicles on our roads has increased global demand for the metal, which is used in electric batteries.
According to a report publish by the Joint Research CentreEuropean Commission’s Joint Research Centre, demand started to exceed supply last year. With electric vehicle stock expected to grow from 3.2 million in 2017 to 130 million in 2030, demand for cobalt is expected to increase threefold within the next decade, outstripping supply by 64,000 t.
The ultimate consequence of supply bottlenecks is the shutdown of the automotive industry. Volkswagen and Continental have both said they expect bottlenecks to continue well into 2021.
As demand for semiconductors rise in now-recovered China, supplies that are available could be monopolised by Chinese automakers, to the possible detriment of car manufacturers elsewhere in the world.
As connected vehicles become smarter and electric cars come to dominate the market, components like semiconductors will become even more vital in the production process. As different industries compete for limited supply, the automotive sector’s ability to recover from COVID-19 lies in the balance.
Likewise, if manufacturers are unable to commit to electromobility, emissions targets are unlikely to be achieved.
What can the automotive industry learn from the semiconductor bottleneck?
To futureproof the supply of semiconductors to the automotive industry, collaboration is key. Strong relationships need to be developed between automakers, car parts suppliers and manufacturers. As a basic business principle, chipmakers will supply where there’s most demand and outside the current bottleneck, that typically lies in consumer electronics.
However, it’s estimated that the global automotive industry will grow to just under 9 trillion U.S. dollars by 2030, with new vehicle sales accounting for approximately 38 % of this value. As such, the automotive industry needs to make chipmakers aware of this growth and the resultant business to be had in the industry in the future.
In a recent report, the German manufacturing association, ZVEI, called for an economic policy framework to strengthen the potential for investment in the supply industry in Europe, stating that ‘removing barriers to trade, and the trade of technologies, are crucial for Europe’s recovery.’
For chipmakers, boosting semiconductor supply isn’t as simple as increasing production. Significant investment is needed to build the infrastructure required to produce a range of products. Continental, for one, has already called on chipmakers to increase capacity in the foundries that produce semiconductors and it does seem that some are answering the call.
For example, German chipmaker Infineon is increasing investment in production capacity in 2021 to EUR1.5 billion, from EUR1.1 billion in 2020. The company is also increasing capacity at its facilities in Austria.
In summary, the future supply of electric drive components relies on supply chain collaboration, increased awareness of the industry’s rising net worth and investment in production capacity.