The last two years have been challenging for many industries as the COVID pandemic struck around the globe, but few have been hit as hard as automakers. As a direct consequence of the pandemic, factory shutdowns and supply chain bottlenecks caused a worldwide shortage of high-performance integrated circuits, severely crippling the global auto industry.
What happened to global chip production during COVID?
When COVID-19 struck at the beginning of 2020, the semiconductor industry—the one that produces electronic components for all our smart devices—was badly affected. Major shutdowns, delays, virus protocols, and other unpredictable issues in production and supply chains disrupted manufacturing processes. Simultaneously, other industries suffered similar problems, which has led many chip buyers to reduce or completely cancel their orders. Sales numbers spiraled down in a short period. On the following graph of semiconductor sales, notice the 30 percent sales drop from March to September 2020. This was the period when many factories were closed or underutilized. But then came a surprising turn of events.
The semiconductor market recovered by September 2020, and already by the end of the year the demand was not only back to normal, but chips were suddenly sought after more than ever.
This is the moment when the automotive industry realized that they had a huge problem. They were unable to buy more chips because semiconductor manufacturers were completely booked and already producing at maximum capacity.
The auto industry is still waiting for a rebound, but it will take some time. How did this happen?
Rising demand and planning failures
When automakers reduced and canceled their orders to decrease losses, other companies predicted the outcome of the crisis and did the opposite. One such company is Huawei, which during the crisis made massive orders of chips to create reserves while it still could. Apple followed in similar steps to secure their supplies. Chip manufacturers happily jumped to new orders, leaving automakers forgotten behind.
Then cryptocurrencies did their part to worsen the situation. Bitcoin surged to unimaginable heights trying to reach an epic $100,000 price, and while it ultimately failed in its goal, crypto mining has been booming so much that it doubled the prices of graphics cards and caused a severe market shortage. This shortage has been ongoing for quite some time now and is practically a crisis of its own. People are selling used graphic cards to crypto miners at double prices, and PC sellers are encountering difficulties in assembling appropriate machines due to a lack of graphic cards. Graphics card manufacturers seem unable to meet the demand, and the prices rose to the highest levels in a decade.
Forget not that the whole educational system transitioned to online lecturing, prompting a massive PC and laptop equipment buyout. Most companies also turned to online work from home. Mobile phone demand stayed as strong as ever. These are just some of the factors that led to the crisis in the auto industry.
Despite the unfortunate turn of events for the auto industry, some suggest that automakers failed badly in their planning. Supporting this claim is the fact that both during the pandemic and now, car demand is still high. Meanwhile, carmakers are unable to supply pre-COVID numbers. It is a huge, missed opportunity, but where there is a demand there is also a chance to recover losses and come out on top.
Solving the chip shortage crisis
It turns out that the chip shortage is a much bigger problem than most ever realized, and there is only one solution to it: increase production. But that is easier said than done, and efforts so far have only helped to alleviate the issues.
For example, Japanese semiconductor manufacturer Rohm recently reported that they couldn't fulfill the demand throughout the next year due to their own supply problems. They are already working at 100 percent utilization and can’t expand production anytime soon, as their own suppliers can’t procure equipment needed for chip production. Semiconductor manufacturing equipment is especially high-tech machinery that few organizations have access to. China, for instance, is trying to join the big players in the industry, but one of the reasons they still fail is due to the difficulties of developing and producing such equipment.
As a result, one of Rohm’s major Rohm's, Toyota, was severely affected by shortages and had to cut its global production output by a massive 40 percent. Toyota announced that it expected to produce an estimated 360,000 vehicles less than planned and that in September it will shut down all but one of its manufacturing plants in North America. Reasons cited for shutdown are COVID-19 and unexpected events in the supply chain.
Other manufacturers are facing similar issues, and production ramp-up is taking its toll. TSMC, one of the world’s largest semiconductor producers, announced that it will increase its output by 60 percent during 2021. The company also noted that it plans to prioritize automotive industry orders, giving automakers at least some sign of relief.
“TSMC has taken unprecedented actions, including the reallocation of capacity from customers from other industries who are experiencing stressfully high demand due to the acceleration of digital transformation,” the company stated.
Still, the chip production process is one of the most advanced and complex manufacturing processes invented by humans. A single chip can take up to 26 weeks from the start of production to its completion. That’s a half-year wait for anyone making new orders—if production starts immediately.
Who makes the chips and why is the U.S.A. asleep?
United States automakers were very vocal and proactive during the crisis, but ultimately with little effect. That the situation in North America is far from ideal was confirmed over Twitter by infamous Tesla CEO Elon Musk, who tweeted last month:
“Tesla makes cars for export in the first half of quarter and for the local market in the second half. As publicly disclosed, we are operating under extreme supply chain limitations regarding certain “standard” automotive chips. Most problematic by far are Renesas & Bosch.”
In another tweet, Musk also noted that cars are produced only as fast as their slowest part, indicating that it doesn't matter if the company can produce 90 percent of the vehicle, as such cars still can't be shipped.
It may come as a surprise to many, but for decades now the United States has been the world’s leading producer of semiconductors according to the Semiconductor Industry Association (SIA). Some of the most known names in the market are Intel, NVIDIA, Texas Instruments, and Micron Technologies. There are different metrics one could probe (e.g., chip count, profits), but based on data from 2020, Intel is the world's biggest semiconductor manufacturer followed by giants such as Samsung, TSMC, and SK Hynix. There is a catch here, and that is that the U.S. is the biggest world exporter of semiconductors, so not all these chips are available to the domestic automotive industry. Semiconductor export status in the U.S. is something that may be carefully considered in the future.
Most of the other renowned semiconductor manufacturers are in Asia. Samsung and SK Hynix are based in South Korea, TSMC is in Taiwan, and there are dozens of smaller manufacturers located throughout Asia. The ratios vary over time, but in recent years American manufacturers were producing 52 percent of their chips domestically. According to the SIA report, the U.S. semiconductor industry’s manufacturing output has remained stable for many years, unlike many other parts of the tech manufacturing sector. It is a myth that the county has outsourced all its production to Asia for a cheap workforce and profits.
There are several reasons for U.S. companies to keep production in their home country. One of them is that the U.S.A. is the best environment in the world for IP rights protection of vital technologies. Another strong point is easy access to specialists and a highly educated workforce, which is crucial for such a heavy research and development field. Then there is a matter of national security and economic dependency, so the government will always want to maintain a healthy production at home. Still, even with the majority of its production based in the U.S., automakers such as Tesla are unable to fulfill their quotas.
Tesla has two large Giga factories in North America as well as their soon-to-be-completed Giga Berlin-Brandenburg factory in Germany. Giga Berlin is regarded as the most advanced high-volume production plant of electric vehicles in the world. All these factories are struggling, even though Elon Musk promised to produce the first cars in Giga Berlin by the end of the year. The factory is yet to open, and will likely do so in October, which will only lead to further demand increases. One bright spot for Tesla is their Giga Shanghai factory in China, which seemingly has fewer supply issues. But the company there competes with several other automakers such as Nio, Xpeng, and Li Auto. It is only natural that China wants to have these local manufacturers dominate the market, and political influence is certainly a serious factor in the race to obtain supplies. These companies may be less known in the western world, but they are investing billions in research and development and are very serious competitors for better-known automakers.
The U.S. is aware of the situation and the Biden administration is looking to offer financial support and significantly bolster domestic chip production. The U.S. will likely significantly increase chip production, while also reducing exports to protect its own industry.
What is so special about car chips?
An anticlimactic answer to this question is that there is nothing special about car chips.The difficulties now facing automakers could likely have been avoided by proper planning. There are, however, some issues with car design. Experts noted that the industry is using many different variants of chips, including some made with older technologies, which complicates the production process. These are for example chips that control the opening of car windows; seemingly insignificant, but as Elon Musk said, a car is only produced as fast as its slowest part.
There is a lesson to be learned here: carmakers need to take a careful look at designs and unify the electronics used to avoid future manufacturing delays.
Are we approaching the end of the crisis?
There is a certain optimism in the air as signs of recovery are appearing in the auto industry. Many are looking to better times even though the crisis is expected to last throughout 2022. Hopefully, as the supply increases, life will return to normal by 2023. Still, COVID-19 is present throughout the world and there are fears of further disruptions. Meanwhile, affected industries will have lots of work to do to find themselves better prepared for future unexpected events.