Car Companies Buckle Up for Extended Chip Shortage

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Constraints in Asia and the auto sector’s challenge to ramp up production of more basic computer chips could exacerbate the parts crisis by 2022.

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For months auto executives have expressed optimism that the problem will subside by the end of the year. Now, there is an emerging view that chip shortages have turned from a short-term crisis to a structural upheaval for the automotive supply chain that could take years to fully go away.

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There are fresh hurdles to test and package semiconductors in Asia, further hampering chip supplies to auto makers. Meanwhile, semiconductor makers are gradually eliminating the low-tech, low-margin chips that are prevalent in new vehicles, further fueling concerns about the availability of those chips.

Auto makers are facing a two-pronged challenge: finding the chips they need to keep their factories running today, while game-planning to ensure long-term supply, which includes more US-based manufacturing of semiconductors. Huh.

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“After all, if we don’t make feature-rich chips that only the auto industry uses, all of our jobs are at risk,” Jim Farley, Ford Motor Co.

CEO said in an interview.

Some auto makers are already redrawing their 2022 plans.

Peter Anthony, chief executive of a Chicago-area supplier, recently cut his volume estimates by 20% for the first half of next year. However, this estimate is an informed estimate, as their customer orders change from day to day based on chip availability, he said.

“Nobody knows,” said Mr. Anthony, whose UGN Automotive makes interior carpets and insulation for several Japanese auto manufacturers. “It’s total bullshit.”

The latest sign that the challenges of chip shortages are not over are expected on Friday, when major car companies report third-quarter US sales. Analysts expect a sharp drop in third-quarter sales after a strong spring, as semiconductor shortages hit vehicle production and left dealerships with little or no stock.

Analysts and industry executives say the auto industry’s continued troubles date back to the early days of the pandemic, when auto suppliers canceled chip orders over concerns over weak demand. Consumer-electronics companies left car companies and their parts suppliers with a shortage of chips when car sales returned in the summer of 2020.

The multiple failures further reduced the availability of the chips, which are used in everything from anti-lock brakes to multimedia displays. Power outages, fires and other disasters at a major semiconductor manufacturer have disrupted chip production from Texas to Germany and Japan.

Now, the industry is facing further bottlenecks in the supply chain. Semiconductors made by large manufacturers such as Taiwan Semiconductor Manufacturing Co.

, Malaysia and other Southeast Asian countries for assembly and testing. Those companies have recently faced disruptions in production due to pandemic-related restrictions and the growing COVID-19 outbreak.

That part of the supply chain is expected to experience an expanding backlog for chips used by the auto industry as well as other sectors, even as pandemic restrictions ease, said Phil Amsrud, a senior analyst at research firm IHS Markit. Said, who specializes in automotive. semiconductor market.

“These back-end companies operate on a much thinner margin than semiconductor manufacturers”, Mr Amsrud said. “For them to make a major investment in capacity, they have to be absolutely sure of short-term and long-term demand.”

Even for companies that are looking to expand capacity, the lead time for some of the manufacturing equipment needed to boost production could extend up to nine months, he said.

This holdup is the main reason why IHS recently slashed its forecast for global vehicle production in 2022, cutting nearly 8.5 million vehicles from its previous outlook for a total of 82.6 million. The company attributes this year’s production losses to supply-chain disruptions, primarily chip shortages, of about 10.6 million vehicles.

Consulting firm AlixPartners LLP estimates that chip shortages will generate $210 billion in revenue for the industry this year, nearly double its forecast from May.

One factor that leaves the auto sector at a potential disadvantage is its reliance on older chips, called microcontrollers. They have been used to electronically control engines, air bags and other vehicle functions for decades, and are widespread due to their low cost and reliability.

But, of the roughly $400 billion that semiconductor companies have announced planned capacity expansion, very little of it is expected to go toward microprocessors, according to the IHS.

RBC Capital analyst Joseph Spaak said semiconductor companies lack incentives to invest in excess capacity for older technology. And while auto makers are moving to more advanced chips as they introduce electric and connected cars, the upgrade will put them in more direct competition for chips with makers of consumer electronics, he said.

“We believe there may be structural reasons why quasi capacity could limit automotive production in the coming years,” said Mr. Spaak.

The severity of the shortage has disproportionately affected auto manufacturers. For example, Ford has lost more production in North America than any global car company — about 566,000 vehicles, according to research firm Autoforecast Solutions. But Ford officials have said the situation is improving.

Ford’s Mr Farley said the company’s near-term strategy includes securing backup stocks of chips and signing direct contracts with semiconductor companies rather than relying on Ford’s direct suppliers. He has also proposed designing some vehicle components to require fewer chips.

Meanwhile, General Motors Co.

For most of the year it had managed to avoid production cuts of its most profitable vehicles, large pickup trucks and SUVs. Recently, however, it has canceled work shifts at its truck factories, which is expected to cut third-quarter earnings.

GM Chief Executive Mary Barra said in September that the automaker is working directly with semiconductor makers to secure the chips.

“We are going to make some significant changes to our supply chain,” Ms. Barra told Delta Air Lines Inc. said in an online interview conducted by Chief Executive Ed Bastian. “It’s a solvable problem, but it’s going to be here a while longer.”

Mike Colias at [email protected]

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