The Semiconductor Chip Shortage and Impacts on the Automotive Industry—A Partstack Guide

Semiconductor Chip Shortage: Impact on Automotive Industry

by

Rayan Bajwa, PhD

Executive Summary

Contents

Booming demands for electronic products coupled with

Part 1: Semiconductor Market and Supply Chain .................. 2

the COVID-led instabilities have caused a severe

Global Semiconductor Market ........................................... 2

shortage of semiconductor chips. While this chip crunch

Semiconductor Market Segments ..................................... 2

has disrupted operation of many industries, the effect on automotive industry was the strongest, primarily because the vehicle OEMs overlooked the fragilities of

by

Semiconductor Supply Chain and its Fragility.................... 3 Part 2: Chip Shortage and Automotive Industry .................... 5 Reasons Behind Semiconductor Crisis ............................... 5 Current Status of Shortage ................................................ 6

semiconductor supply chain.

Automotive Industry Under Chip Shortage ....................... 8

Since initial impacts, automotive industry has been

Why Automakers were Hit the Hardest? ........................... 9

trying to restore the supply-demand balance; however, full recovery is nowhere near in sight. Automakers and

Impacted Automotive Semiconductor Chips ................... 10 Automakers and their Strategies ..................................... 10

chip makers need to act in collaboration to mitigate the

Part 3: Outlook of Automotive Industry Amid Chip Shortage ............................................................................................. 12

supply issues, where focus should be on expanding the

Automotive Sale Forecast ................................................ 12

local chip production capacity and improving the

Way to Move Forward ..................................................... 13

demand planning for automotive chips.

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References ........................................................................... 15

Part 1: Semiconductor Market and Supply Chain Global Semiconductor Market 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 Demand for semiconductor products is survival1. Over the years, semiconductor industry higher than ever, as we are moving towards has seen a tremendous growth, where not only it the era of autonomous vehicles and Internet has been able to miniaturize the devices (as per of Things (IoTs), along with the trend for “Moore’s Law”) but also broaden its application remote work that has greatly enhanced the scope that now includes autonomous vehicles and Internet of Things (IoT) devices. need for consumer electronics.

Recalling the earlier times, the global semiconductor market was valued at around $204 billion in 2000, which soared to $555 billion in 2022, exhibiting an annual compound growth rate (CAGR) of 4.9%2 (Exhibit 1). USA is among the key consumers of semiconductor devices, where sales in the region reached $150 billion (in 2022), accounting for 24% of the global market. With multiple rapidly growing underlying technologies such as AI, smart cars, 5G, the semiconductor market is expected to grow swiftly in the coming years, with projected global market value of $662 billion by 20242.

Exhibit 1.

A look at the evolution of semiconductor market size.

Source: World Semiconductor Trade Statistics2.

Semiconductor Market Segments 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

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Semiconductor Chip Shortage: Impact on Automotive Industry

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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 from 2021 to 2030.

Exhibit 2.

Semiconductor market segments and their expected growth from 2020 to 2030.

Source: Accenture and McKinsey analyses3,5.

Semiconductor Supply Chain and its Fragility Producing semiconductor chips is an extremely complex process, typically involving hundreds of steps performed by different companies at different 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 For more tech insights visit us at https://partstack.com/

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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.

Exhibit 3.

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.

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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.

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

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.

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90%, they could not satisfy the demands immediately, owing to long lead times, eventually translating to a severe chip shortage (Exhibit 4).

Exhibit 4.

Inventory status and foundry utilization rate: recent variations and forecast.

Source: Gartner9. Figures are approximate.

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.

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Exhibit 5.

Forecasted end of chip shortage.

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 production capacity and demand is getting tighter and tighter. Forecasts have shown that global wafer shipments will increase with a CAGR of 6% from 2020 to 2025 (Exhibit 6)13. In contrast, the production capacity expansion rate is much lower; global chip production capacity has increased at a rate of 4% per year from 2000 to 2020. Chip manufacturers would not be able to process all that forecasted silicon area in time, if they do not expand their capacity soon.

Exhibit 6.

Global Wafer Shipment Forecast, 2020-2025.

Source: SEMI: Projected global silicon wafer shipments13.

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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 Interestingly, an automobile with market cost in were aware of the recurring semiconductor supply chain issues, avoided any sudden thousands of dollars cannot be sold to consumers change in buying patterns and kept their with a missing essential chip costing only a few original contracts with the semiconductor dollars (e.g., airbag sensor). suppliers, which in turn made vehicle OEMs 10 a low priority to chip makers . Additionally, the closure of production plants of NXP and Infineon (two main automotive semiconductor suppliers) further deepened the impact of shortage on automakers10.

Exhibit 7.

Global Automobile Demand Change in 2020 Compared to 2019.

Source: KMPG: Surviving the Silicon Storm10. Figures are approximate.

Since semiconductor chips are the fundamental element of any modern-age 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.

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Exhibit 8.

Global Light Vehicle Production in Millions, 2018-2022.

Source: J.P. Morgan analysis14. Figures are approximate.

Why Automakers were Hit the Hardest?

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.

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Exhibit 9.

Automotive semiconductor segments by node size (2021); and a comparison between demand and capacity of auto-chips in 2022.

Source: McKinsey analysis7.

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.

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Exhibit 10.

Global Car Sales (in Millions) of Ford, GM and Tesla, 2018-2021.

Source: Statistica18-20.

Other automakers were also not immune to shortage including Volkswagen that produced 1.15 million fewer vehicles, and Toyota and Stellantis, each of which 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 Though software re-work by Tesla has proven are adding more functionalities in chips, to chips for multiple to be effective, it is not a long-term solution, as configure single 22 functionalities . Similarly, Tesla re-wrote there exists a practical limit to what a single some of its software to enable multichip can do. functionality 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.

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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.

Part 3: Outlook of Automotive Industry Amid Chip Shortage Automotive Sale Forecast Benefitting from the gradual decrease in chip crisis severity, automotive industry is now ramping up the production. Though production is still nowhere near the pre-pandemic levels (Exhibit 8), the increasing trend is promising, which can be Exhibit 11.

Global and Local Light Vehicle Sale Forecast (in Millions)

Source: HIS Markit: Global Light Vehicle Sales Summary23.

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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 to expand massively, at a CAGR of 46%, from 2019 to 2025 (Exhibit 12). New energy vehicles relying on extreme electrification require twice the semiconductor content, compared to conventional internal combustion engine (ICE) vehicles10. Accordingly, automakers should move proactively here to efficiently tackle any unforeseen semiconductor supply chain issues of the future, since with EVs in the market, reliance of automotive industry on chip makers will be higher than ever.

Exhibit 12.

Global New Energy Vehicle Sale Forecast (in Millions)

Source: Deloitte analysis1.

Way to Move Forward What Automakers Can Do 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

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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 Interestingly, local fabrication capacity in USA local semiconductor companies is located in is decreasing with time, as many local semiconductor makers are now shifting their USA as of 2021, dropping from 57% in 2013. 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.

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References 1.

Deloitte, “Fighting an unprepared battle – Rethinking auto semiconductor strategy in an uncertain era”, 2021.

2. World Semiconductor Trade Statistics, 2022.

3. Accenture, “The long view of the chip shortage”, 2021.

4. Semiconductor Industry Association Factbook, 2022.

5. McKinsey and Company, “The semiconductor decade: A trillion-dollar industry”, 2022.

6. Accenture, “Harnessing the power of the semiconductor value chain”, 2022.

7. McKinsey and Company, “Semiconductor shortage: How the automotive industry can succeed”, 2022.

8. MDPI, “The “Semiconductor Crisis” as a Result of the COVID-19 Pandemic and Impacts on the Automotive Industry and Its Supply Chains”, 2022.

9. Gartner Webinars, 2022.

10. KPMG, “Surviving the silicon storm”, 2021.

11. Bain and Company Technology Report, 2022.

12. KPMG, “Global semiconductor industry outlook”, 2022.

13. SEMI: Worldwide Silicon Wafer Shipment Statistics, 2022.

14. J.P. Morgan, “Supply Chain Issues and Autos: When Will the Chip Shortage End?”, 2022.

15. IHS Markit, “Analog chips – poised to become the next big threat to automakers?”, 2022.

16. Roland Berger, “Steering through the semiconductor crisis”, 2021.

17. MIT Sloan, “How auto companies are adapting to the global chip shortage”, 2022.

18. Statista, “General Motors - number of vehicles sold worldwide 2010-2021”.

19. Statista, “Tesla's vehicle sales by quarter YTD Q3 2022”.

20. Statista, “Wholesale vehicle sales of the Ford Motor Company 2009-2021”.

21. CNET, “Why the heck is there still a chip shortage for cars?”, 2022.

22. Supply Chain Dive, “Tesla rewrites software to get around chip shortages”, 2022.

23. IHS Markit, “Global Light Vehicle Sales Summary”, 2022.

24. Reuters, “Biden signs order on $52 billion chips law implementation”, 2022.

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