How Covid Led to a $ 60 Billion Global Chip Shortage for Automakers

Automakers around the world are expected to lose billions of dollars in profits this year due to a shortage of semiconductor chips, a situation that is expected to worsen as companies scramble to supply critical parts.

Consulting firm AlixPartners expects the shortage to cut $ 60.6 billion in revenue from the global auto industry this year. That conservative estimate includes the entire supply chain, from dealers and automakers to large tier one suppliers and their smaller counterparts, according to Dan Hearsch, managing director of the New York-based firm’s automotive and industrial practice.

“All the way up and down the supply chain, everyone loses a piece of money,” he said. “This could be 10% of global demand this year, its impact, which slows the recovery. We don’t think we are exaggerating.”

General Motors expects the chip shortage to cut its profits by $ 1.5 billion to $ 2 billion this year. Ford Motor said the situation could reduce its profits by $ 1 billion to $ 2.5 billion in 2021. Honda Motor and Nissan Motor combined expect to sell 250,000 fewer cars through March due to the shortage.

Semiconductor chips are extremely important components of new vehicles for areas like infotainment systems and more basic parts like power steering and brakes. Depending on the vehicle and its options, experts say that a vehicle could have hundreds of semiconductors. Higher-priced vehicles with advanced infotainment and security systems have much more than a basic model, including different types of chips.

“I can’t imagine anyone being saved,” Hearsch said. He said the situation could turn into a “knife fight” between companies, industries and even countries over the supply of chips, which are used in everyday consumer electronics.

One of the only outliers so far is Toyota Motor, which on Wednesday said it has a four-month chip reserve and did not immediately expect the global shortage to affect production, according to Reuters.

Tesla CFO Zachary Kirkhorn told investors during the company’s quarterly earnings call last month that shortages, as well as shipping port capacity, “may have a temporary impact” on the automaker. . In a public presentation, the company said the impact of the shortage is “still unknown,” and said the unavailability of any parts could affect production.

Automobile manufacturers struggle to source chip supplies, which have extremely long lead times due to their complexity. The shortage is far below the supply chain, causing a ripple effect throughout the network.

Some automakers, such as GM and Ford, have confirmed plans to partially manufacture products and store them until supplies for the vehicles are available. Others have said they may look to buy parts directly from smaller suppliers, eliminating much of the current supply chain.

Research firm IHS Markit anticipates that 672,000 fewer vehicles will be produced in the first quarter of 2021 due to semiconductor shortages, including 250,000 units in the world’s largest vehicle market, China.

Although major semiconductor suppliers such as Taiwan Semiconductor Manufacturing and Taiwan-based United Microelectronics have announced investment plans to increase production capabilities, IHS says those plans will do little or nothing to alleviate shortages in the short term.

“Because the cause of these limitations is the result of increasing demand from OEMs and limited supply of semiconductors, they will not be resolved until both forces are aligned,” said Phil Amsrud, IHS Markit Senior Principal Analyst for Advanced Systems driver assistance, semiconductors and components.

One of the most affected automakers is Ford. The company was forced to significantly reduce production this week of its F-150 pickup, which is vitally important to the company’s profits. Ford said it is working closely with its suppliers to purchase the chips, which are largely unique to the truck and cannot be substituted for those in lower-priced vehicles.

That’s different from Crosstown’s rival, GM. The Detroit automaker has temporarily halted production at three North American auto and crossover plants until at least mid-March. The effort is intended to prioritize producing its most profitable full-size pickup trucks and SUVs, according to CFO Paul Jacobson.

The global automotive industry is an extremely complex system of retailers, automakers, and suppliers. The latter group includes larger suppliers like Robert Bosch or Continental AG that source chips for their products from smaller, more focused chipmakers like NXP Semiconductors or Renesas.

A twist in the supply chain during any part of the process can have a tremendous ripple effect on production.

“This is a classic example of the bullwhip effect,” said Razat Gaurav, chief executive of supply chain software and analytics firm Llamasoft. “Small changes in demand, as they propagate up the value chain, variability and volatility increase dramatically.”

Much of the problem starts at the bottom of the supply chain involving “wafers.” The wafers are used with the tiny semiconductor to create a chip that is then put into modules for things like steering, brakes, and infotainment systems.

It takes a 26-week lead time to build the chips before installing them in a vehicle, according to Hau Thai-Tang, Ford’s director of operations and product platform.

The origin of the shortage dates back to the beginning of last year, when Covid caused continuous shutdowns of vehicle assembly plants. As the facility closed, wafer and chip suppliers diverted parts to other industries, such as consumer electronics, which were not expected to be hit as hard by home ordering.

“Those chipmakers, as well as wafer makers, began to redistribute their ability to like consumer electronics, which was growing due to people working from home and virtual work patterns,” Thai-Tang said during a conference. of investors last year. “Fast forward, if you add 26 weeks to the time they made those decisions, the drop or slump in supply started to affect the auto industry in the second half of last year, moving into the first quarter.”

But demand for new vehicles was stronger than expected during the closures, particularly from consumers, so the industry recovered much faster than expected. While that was happening, chip suppliers continued to divert resources from the auto industry and are trying to catch up with the demand from the auto industry.

“There is no easy way out of this,” said Kristin Dziczek, vice president for industry, labor and economics at the Center for Automotive Research. “We knew last year that once they were able to flatten the curve and apply security protocols, they could go back to production. That is not the case now. We have really long lead times and ever-increasing demand for chips.”

– CNBC Lora kolodny contributed to this article.