How Covid Leads to Global $ 60 Billion Chip Shortage for Automakers

Car manufacturers around the globe are expected to lose billions of dollars this year due to a lack of semiconductor chips, a situation that is expected to worsen as companies struggle to supply critical parts.

Consulting firm AlixPartners expects the deficit to reduce revenues from the global auto industry by $ 60.6 billion this year. This conservative estimate includes the entire supply chain – from car dealers and manufacturers to large tier 1 suppliers and their smaller counterparts, according to Dan Hearsch, New York’s chief executive in automotive and industrial practice.

“Throughout the supply chain, everyone has a share of the money,” he said. “This could represent 10% of this year’s global demand, its impact, which creates recovery. We don’t think we’re exaggerating this.”

General Motors expects the lack of chips to reduce its earnings by $ 1.5 billion to $ 2 billion this year. Ford Motor said the situation could reduce its earnings by $ 1 billion to $ 2.5 billion in 2021. Honda Motor and Nissan Motor expect to sell 250,000 fewer cars by March due to shortages.

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

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

One of the only aberrant values ​​so far is Toyota Motor, which on Wednesday said it has up to a four-month stock of chips and did not immediately expect the global deficit to reach production, according to Reuters.

Tesla chief financial officer Zachary Kirkhorn told investors during the company’s quarterly earnings call last month that the lack and capacity of the shipping port “could have a temporary impact” on the carmaker. In a public file, the company said the impact of the shortage is “still unknown”, saying that an unavailability of any part could have an impact on production.

Car manufacturers strive to obtain the supply of chips, which have extremely long delivery times due to their complexity. The shortage is far below the supply chain, causing a ripple effect across the network.

Some carmakers, such as GM and Ford, have confirmed plans to partially build products and store them until supplies for vehicles become available. Others said they could seek to buy parts directly from smaller suppliers, disrupting 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 a shortage of semiconductors, including 250,000 units in the world’s largest vehicle market, China.

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

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

One of the most affected car manufacturers is Ford. The company was forced to significantly reduce production this week of its F-150 pickup, which is extremely important for the company’s profits. Ford said it works closely with its suppliers to purchase chips, which are largely unique to pickups and cannot be replaced with those from vehicles at lower prices.

This is different from rival GM, Crosstown Detroit-based automaker has temporarily halted production at three North American car and crossover plants until at least mid-March. The effort is meant to prioritize the production of its most profitable pickups and SUVs, according to CFO Paul Jacobson.

The global car industry is an extremely complex system of retailers, car manufacturers and suppliers. The latter group includes larger suppliers, such as Robert Bosch or Continental AG, which supply chips for their products from smaller, more concentrated chip manufacturers, such as NXP Semiconductors or Renesas.

A bend in the supply chain during any part of the process can have an extraordinary effect during production.

“This is a classic example of the ‘bullwhip’ effect,” said Razat Gaurav, chief executive of supply chain and analysis firm Llamasoft. “Small changes in demand as they spread upstream in 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 small semiconductor to create a chip that is then inserted into modules for things like steering, brakes and infotainment systems.

It takes a 26-week lead time to build the chips before they are installed in a vehicle, according to Hau Thai-Tang, head of product platform and Ford operations officer.

The origin of the lack dates back to the beginning of last year, when Covid caused the rolling stock of the vehicle assembly plants. As installations closed, suppliers of boards and chips diverted parts to other sectors, such as consumer electronics, which were not expected to be equally affected by home orders.

“Those chip makers, as well as wafer makers, have begun to redistribute their ability to enjoy consumer electronics, which was on the rise due to people working from home and virtual work models,” said Thai. -Tang at an investor conference last year. “Fast forward, if you add 26 weeks to the time they made those decisions, the dropout or supply chute began to hit the auto sector in the second half of last year, reaching the first quarter.”

But demand for new vehicles was more resilient than expected during downtime, especially by consumers, so the industry recovered much faster than anyone expected. As this has happened, chip suppliers continue to divert resources from motor vehicles and try to keep up with demand in the automotive industry.

“There is no easy way out of this,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research. “Last year we knew that once they managed to flatten the curve and implement safety protocols, they could return to production. This is not the case now. We have very long delivery times and we have a growing demand for chips. “

– CNBC Lora Kolodny contributed to this article.