The chip famine is starving the global auto industry and putting car buyers on a strict diet, writes The Wall Street Journal (Sept. 23, 2021). So far this year, 7 million cars that were supposed to be produced haven’t been. Auto companies are shutting down production lines for weeks at a time and furloughing employees as a result of the chip shortage. Toyota has slashed its production 40% this month. But the chip famine won’t be solved quickly, as supply won’t catch up with demand until late 2022 and into 2023.
The inventory of new cars in the U.S. is only about 30% of pre-pandemic levels, and buyers snap up used cars as soon as they find them. Rental companies reduced their inventories during the pandemic and now don’t have enough cars to meet demand.
Cars need more than 1,000 computer chips for functions like raising windows, adjusting AC, and cruise control. They don’t need advanced chips like those in smartphones. Instead, they use mass-produced microcontrollers. Over the past decade, fewer companies have produced these chips. But an adequate supply of chips is going to become even more important for the auto industry’s future. Electric and self-driving vehicles require both leading-edge and traditional chip technology, and an EV powertrain has 3 times as many semiconductors as a traditional engine. The average vehicle currently contains about $450 worth of semiconductors–a number expected to double by 2030.
The auto industry’s reliance on a shrinking supply base to produce semiconductors was risky. The pandemic has turned that risk into a serious shortage. Beginning in 2020, auto makers had to compete for chips against electronics manufacturers producing goods for locked-down consumers and 5G mobile networks.
Covid outbreaks also shut down factories, breaking links in the supply chain. The Vietnamese plants that fabricate chips for Asian manufacturers stopped working in August. A drought in Taiwan disrupted water-intensive chip production; a fire at a Japanese semiconductor factory restricted supply; and a winter storm hit semiconductor plants in Texas. Some auto companies are paying premiums to secure chips.
The obvious answer to the chip famine is to increase manufacturing capacity. But that is expensive and takes time. Semiconductor companies may not want to invest in traditional chip technology when future demand likely will come from higher-value chips for applications like AI. While the chip industry has announced nearly $400 billion in new investment as the chip famine unfolded, only a small portion of this investment will be used to address the chip shortage afflicting auto makers.
Classroom discussion questions:
- Why can’t chip makers increase capacity quickly to handle the high demand?
- Which analytic model in Supp. 11 of your Heizer/Render/Munson text can be used to address supply chain difficulties?