Semiconductor Chip Shortage: Impact on Automotive Industry
Executive Summary
Booming demands for electronic products coupled with the COVID-led instabilities have caused a severe shortage of semiconductor chips. While this chip crunch has disrupted operation of many industries, the effect on automotive industry was the strongest, primarily because the vehicle OEMs overlooked the fragilities of semiconductor supply chain. Since initial impacts, automotive industry has been trying to restore the supply-demand balance; however, full recovery is nowhere near in sight. Automakers and chip makers need to act in collaboration to mitigate the supply issues, where focus should be on expanding the local chip production capacity and improving the demand planning for automotive chips.
by Rayan Bajwa, PhD byPart 1: Semiconductor Market and Supply Chain
Global Semiconductor Market
Demand for semiconductor products is higher than ever, as we are moving towards the era of autonomous vehicles and Internet of Things (IoTs), along with the trend for remote work that has greatly enhanced the need for consumer electronics.
Massive demand for electronic devices coupled with the ongoing supply issues have allowed us to realize that semiconductor industry is now one of the “Critical industries” which are essential for survival1 Over the years, semiconductor industry has seen a tremendous growth, where not only it has been able to miniaturize the devices (as per “Moore’s Law”) but also broaden its application scope that now includes autonomous vehicles and Internet of Things (IoT) devices.
Semiconductor chips, nowadays, are the brain for almost every device we use, smart phones, personal computers, cars, and a variety of industrial equipment etc3. The overall semiconductor market is broadly segmented into 5 main
sectors based on the type of end-use: data processing, consumer electronics, communication (wired and wireless), automotives and industrial/aerospace electronics. Data processing and communication chips have been with us for a long time, and these sectors are well-matured, corresponding to 62% of the total market (2022)4 . Automotive semiconductors and consumer electronics, on the other hand, reflect a relatively low market share, but possess a significantly high growth potential in near future Automotive sector is expected to grow triple in size by 2030. Such immense growth is fueled by the current focus of automobile industry on autonomous vehicles that would literally perform every function via smart chips. Forecasts have shown that semiconductor industry can eventually achieve the “Trillion-Dollar” milestone by 2030 (Exhibit 2), where automotive semiconductors would see the strongest growth i.e., 13% CAGR
locations, which can take months to complete The overall semiconductor supply chain has four major divisions (Exhibit 3)6, which are listed below:
1. Chip Design: Chip designing is partly carried out by the “fabless companies” (e.g., Nvidia and Qualcomm), whose sole focus is to design the semiconductors, and such companies do not possess their own
fabrication facility (called as “foundry”). Another type of chip designers are the integrated device manufacturers (IDMs) that not only design the chips but also manufacture them.
2. Manufacturing: Semiconductor chips are fabricated by either IDMs (e.g., Texas Instruments, Intel and Infineon) or dedicated foundries such as TSMC (Taiwan semiconductor manufacturing company) and GlobalFoundries
3. Test and Packaging: Following the fabrication, outsourced semiconductor assembly and test (OSAT) companies, such as Teradyne and Amkor, are generally reached for the packaging and assembly of chips (known as back-end manufacturing).
4. End Product Integration: Packaged chips are integrated into end products by original equipment manufacturers (OEMs), such as vehicle OEMs, and supplied to consumers.
Semiconductor supply chain and involved key players.
A strong global interdependence among the players of semiconductor supply chain results in high fragility, particularly in uncertain events such as COVID-19. For instance, during early stages of pandemic, the overall demand for semiconductors decreased abruptly, followed by a sudden rise driven by the boom in consumer electronics demand3. The supply chain, however, was unable to cope with such demand fluctuations owing to various reasons including pandemic-related logistics constraints, long lead times, and limited number of foundries.
Part 2: Chip Shortage and Automotive Industry Reasons Behind Semiconductor Crisis
The harmony between supply and demand of semiconductors disrupts every few years, but scarcely reaches to the level of shortage we are facing now. Pandemic-originated instabilities, coupled with the limited global fabrication capacity and super-high demand as well as some natural incidents, have led to a severe global chip shortage. The key factors behind the current semiconductor shortage are listed below.
Booming Demand and Low Global Production Capacity
Matching the strong chip demand driven by widespread deployment of 5G, and increasing interest in consumer electronics and smart vehicles, requires a continuous growth in the semiconductor production capacity. There are around 470 semiconductor companies around the globe, out of which only 31 companies are equipped with a foundry3. Though efforts are being made to expand the existing foundries and add more foundries to semiconductor ecosystem, the overall global production capacity for semiconductor chips is still low. This is because scaling up the semiconductor production is not straightforward, where building an average foundry takes more than 3 years to build7 and costs billions of dollars8 .
Vulnerabilities of Supply Chain
Recent market uncertainties brought by pandemic have clearly revealed many weak links in the semiconductor supply chain. We have seen that strong reliance on Asian foundries is a highly undesirable vulnerability, which became visible under pandemic-driven logistics issues3 TSMC, the leader in semiconductor fabrication, produces 60% of the total chips used worldwide3. In other words, a slight disturbance at TSMC would affect at least half of the global semiconductor industry.
Semiconductor industry has an intricate supply chain, where a slight disruption makes deep impacts. Any discrepancy between supply and demand ripples back and forth multiple times, before fully resolving.
Another key issue in chip supply chain is the significantly long lead times; typically, more than 4 months, which essentially indicates that the industry is practically incapable of embracing any sudden changes in demand. As the pandemic emerged, the demand for semiconductor dropped, and hence the overall semiconductor inventory level increased. Accordingly, the foundries reduced their utilization rates, simply because there wasn’t enough demand. The demand, however, resurged rapidly to the levels beyond the forecasts, which in turn decreased the inventory levels substantially. At this stage, though foundries ramped up their utilization above
Natural Incidents
In addition to pandemic effects and inherent limitations in the structure of semiconductor industry itself, natural disasters/incidents have also played their part in intensifying the semiconductor shortage10 In 2021 February, a severe winter storm in Texas (USA) led to the closure of fabrication sites located in the area (NXP and Infineon). A fire broke out at Renesas Electronics fabrication facility in March 2021, which stopped the production of various semiconductor chips8 .
Current Status of Shortage
Almost three years into the pandemic, and semiconductor industry is still battling the chip shortage. Fortunately, semiconductor inventory levels are now increasing with foundry utilization rates dropping9, which reflects that the shortage has likely passed the peak. However, the chip crunch will certainly not resolve fully anywhere in the near future, while some industries, including automotive and consumer electronics, are expected to see some relief in late 2022 and early 202311 . In a survey conducted earlier this year, most industry experts (56%) were of a notion that the chip shortage will stretch well into 2023
(Exhibit 5)12
Source: KMPG global semiconductor industry outlook 202212 .
Factors Behind Prolonged Shortage
Many OEMs and suppliers have started to over-order and over-stock the semiconductor chips, as a reaction to ongoing chip crunch. Such exaggerated demands have in fact initiated the “Bullwhip” effect7,10, which has further escalated the supply-demand mismatch. In such situation, a closer collaboration between OEMs and chip manufacturers is beneficial, which would allow a better assessment of the demand fluctuations10
Apart from supply chain complexities, we are also approaching the limits of production capacity, which is also prolonging the shortage. Foundries have been running with utilization rates more than 90% (Exhibit 4), and the gap between
Automotive Industry Under Chip Shortage
Though all semiconductor-buying industries were affected by the shortage, the blow on automotive industry was the hardest. The automotive industry experienced a sudden drop in demand, during the early stages of pandemic (30% drop in early 2020 compared to 2019, Exhibit 7), where many vehicle OEMs rushed into lowering their semiconductor purchases to balance the overall costs. Very soon after, the automobile demand elevated back and even surpassed the original forecasts, and as a response, the vehicle OEMs tried to rebuild their semiconductor inventory. However, during all this, other OEMs that were aware of the recurring semiconductor
Interestingly, an automobile with market cost in thousands of dollars cannot be sold to consumers with a missing essential chip costing only a few dollars (e.g., airbag sensor).
vehicle, automakers are now unable to complete the vehicle manufacturing amid this chip shortage. Chip crunch severely halted the global production of light vehicles in 2020 (Exhibit 8)14, where in first two quarters of 2020, the production tumbled by 9.6%, accounting for ~7.7 million vehicle8 Almost all the major automakers including Ford, Tesla, Audi, Volkswagen, Toyota and so on, were affected by the shortage to some extent8 . For example, the US-based giant, Ford Motor Company, had to stop production at some of its plants located worldwide, and the company expected $1-2 billion reduction in 2021 profits8
Just-in-time Purchasing
Auto-makers prefer ‘just-in-time’ manufacturing approach, which minimizes the wastage and yields high efficiency7 . Accordingly, in contrast with the more conventional chip consumers such as PC makers, automakers establish shorter contracts with semiconductor manufacturers maintain their inventory at low levels, to reduce the costs. Though such approach provides vehicle OEMs with high gains in normal scenarios, it makes them highly susceptible to losses in case of any shortage. Similarly, during ongoing shortage, chip manufacturers have preferred other OEMs over automakers, owing to their long-term bindings.
Demand Overlap with Other Emerging Technologies
Most automotive chips (~93%, as of 2021) are fabricated at large, mature nodes (>22nm), called as trailing edge nodes. These trailing edge chips also gained significant popularity during recent 5G rollout and IoT development, particularly the analog chips for RF front-end circuitry and microprocessors as IoT controllers. Hence, there is now a huge demand overlap for chips required by automakers and other emerging technologies, pushing the overall demand for trailing edge chips beyond the actual capacity7 (Exhibit 9). On top of that, trailing edge chips are not the prime focus of chip makers, which spend most of their resources on leading edge nodes (<14nm), since they have a larger market share and offer more profit7 . Therefore, apart from coping with the limited focus of chip manufacturers on large nodes, automakers must compete with other rapidly growing technologies, to fulfill their semiconductor needs.
Impacted Automotive Semiconductor Chips
Microcontroller units (MCUs) are inarguably the most affected automotive chips in current shortage1,15, and their peak shortage occurred in 2021 This is because automotive-grade MCUs are generally fabricated on mature nodes (>40nm), which in general have low global capacity. In fact, there has been no significant addition to mature node capacity since 201016 . Additionally, 70% of MCUs for automobiles are fabricated abroad at TSMC, and there exist no comprehensive local replacements1
Other than MCU shortage that is now easing up, the supply of analog chips has started seeing some issues recently15 Analog chips are in high demand nowadays owing to their extensive use in a number of devices including smart phones and contact less payment counters etc. Furthermore, the demand for analog chips for automobiles is expected to increase by 26% by from 2021 to 2023, which essentially highlights the risks for increased analog chip shortage15
Automakers and their Strategies
Current chip crunch has made a strong dent in the revenue of automotive industry, where production missed the target by 11 million vehicles, indicating a loss of around $200 billion to auto-industry17 . Key players, such as Ford and General Motors (GM), have shown a steep decline in their yearly sales (Exhibit 10). In particular, Ford sold 5.4M vehicles in 2019 while only 4.2M in 2020 (22%); meanwhile a similar trend was also observed for GM sales that exhibited 12% reduction in 2020 compared to 2019.
fell short by almost 1 million vehicles21 Interestingly, US-based OEMs were more prone to shortage effects than the Chinese OEMs with their proximity to major chip makers e.g., TSMC. However, a few OEMs were also among the winners in this shortage including Tesla. Despite its focus on electric vehicles (EVs) that require even more semiconductor chips than conventional automobiles, Tesla was able to increase its sales during the shortage. In 2020, where most automakers around the globe lost sales, Tesla somehow managed to sell 32% more cars than in 2019 (Exhibit 10). Amid ongoing chip storm, OEMs have come up with a variety of strategies to re-gain their growth in both short and long terms, some of which are listed below.
Re-configuring the Chips
Many vehicle OEMs, under severe semiconductor shortage, are now trying to work with whatever chips they have. Since chips are programable, companies are adding more functionalities in chips, to configure single chips for multiple functionalities22 . Similarly, Tesla re-wrote some of its software to enable multifunctionality in chips, thus reducing the chip count on a single car. Meanwhile, some OEMs are using alternative chips that are available for non-essential functions, while keeping the chips for critical functionalities unaltered1 .
Though software re-work by Tesla has proven to be effective, it is not a long-term solution, as there exists a practical limit to what a single chip can do.
Improving Inventory Management
Learning from this crisis, automakers are now deviating from the just-in-time manufacturing approaches and investing to increase their semiconductor inventory levels 20-30% beyond the actual requirement7. This strategy would surely help automakers in a long run when chip shortage is fully alleviated. However, at this point when shortage is already there, surplus ordering by automakers is further stressing the foundries
Producing Cars with Reduced Features
The most straightforward strategy opted by many automakers is to reduce the non-critical functionalities from the vehicles, to avoid any delays in production. Many OEMs cutting back the features are promising customers an upgrade later on, when chips will become available. This approach would however increase the overall costs, since companies would have to send the vehicles back to manufacturing facilities for feature installation and calibration etc17
seen as the premature signs of recovery. Based on these speculations, there have been forecasts showing that light vehicle sales will stabilize in next couple of years, and then grow steadily both locally and globally, as we progress towards the end of this decade (Exhibit 11).
Role of EVs in Future Demand of Automotive Semiconductors
Despite the current shortage, market share of automotive semiconductors is expected to grow significantly over the next years, primarily driven by the shift towards new energy vehicles. The market for electric vehicles (EVs) is expected
Automakers have fully seen the vulnerabilities of just-in-time manufacturing approach that is incompatible with the lengthy semiconductor manufacturing, and now they should shift to long term demand planning (3 to 5 years)7 and modify the way they collaboration with chip makers, to immune themselves from any future chip crunch. A direct collaboration with chip makers, while disregarding any intermediate suppliers which currently are an integral part of supply chain, would allow automakers to better comprehend the transients of
chip supply chain10 . In addition, use of data-driven systems to systematically forecast the supply-demand fluctuations in real-time, is another step that automakers should take for better end-to-end planning7 . As a long-term solution, automotive companies should consider investing in chip making businesses to generate additional capacity dedicated for their own demands10 .
What Chip Makers Can Do
Ultimate solution to persisting semiconductor shortage is the expansion of production capacity. However, this is not achievable immediately and can take several years. Apart from capacity expansion on a global level, it is also of particular importance to strengthen the local production of chips, need for which became quite clear during pandemic-related restrictions.
Only 43% of the manufacturing capacity of local semiconductor companies is located in USA as of 2021, dropping from 57% in 2013.
Interestingly, local fabrication capacity in USA is decreasing with time, as many local semiconductor makers are now shifting their capacity to Asian countries owing to their lucrative incentives4 In response to such issues, USA government has recently allocated a budget of $52 billion to expand the local semiconductor manufacturing capacity24, which will weaken the reliance on Asian chip manufacturers and help mitigating the further possibilities of chip shortages in a long run.
References
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