Auto manufacturers have spent decades streamlining their supply chains, using their muscle over parts makers to reduce their own costs by carrying little inventory and relying on suppliers to deliver components “just in time.” But car makers are finding they can’t dictate terms in the same way to the chip industry with its far-broader customer base, particularly now that chip demand is booming globally among a swath of industries. Car makers blame the shortage on tier-one parts suppliers, which generally do most of the chip buying. The shortage will drive the global auto industry to produce nearly 700,000 fewer cars than planned for the first three months of 2021. Auto makers including VW, Ford and GM, have furloughed tens of thousands of workers.
The car-chip pain is partly a self-inflicted wound that traces to the pandemic’s early days, writes The Wall Street Journal (Feb. 13-14, 2021). When the global economy went into stasis, preparations for future car production halted. Auto-parts suppliers reduced orders for electronics, betting that large volumes wouldn’t be needed well into the future.
Chip makers chose not to stockpile parts and wait for car makers’ orders—a decision made easier by surging demand from sales of laptops, servers, smartphones, video game consoles, 5G networks, and other electronics. The harsh reality is that these other products have have a much, much higher rate of return than making chips for cars. Plus only one chipmaker, Taiwanese TSMC, produces about 70% of the units used in the world’s autos.
Still, the car industry largely operated as if electronics suppliers were at its mercy. Normally, when they are calling on their suppliers, everyone is excited about the large volumes. But it must be compared to the billions of smartphones and PCs that are being sold. Unlike with some other parts, said a chip maker exec, referring to the auto makers, “They don’t know how the sausage gets made at the bottom.”
Classroom discussion questions:
1. What is meant by the quote at the end of the blog?
2. Table 11.3 (page 450) in your Heizer/Render/Munson text lists 10 supply chain risks. Which, if any, apply in this case?