How Covid caused a $ 60 billion global chip shortage for carmakers

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

Consulting firm AlixPartners expects the shortage to reduce the global auto industry’s revenue by $ 60.6 billion. 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, managing director of the firm’s industrial and automotive practice based in New York.

“All the way up and down the supply chain, everyone has a share of money,” he said. “That could be 10% of global demand this year, its impact, which will crater the recovery. We don’t think we’re exaggerating.”

General Motors expects chip shortages to reduce 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 by 2021. Honda Motor and Nissan Motor combined expect to sell 250,000 fewer cars by March due to the shortage.

Semiconductor chips are extremely important components of new vehicles for areas such as entertainment 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 security and infotainment systems have much more than a base model, which includes different types of chips.

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

One of the only atypical stocks so far is Toyota Motor, which on Wednesday said it has up to four months of chip stock and did not immediately expect global shortages to reach production, according to Reuters.

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

Automakers are scrambling to get chip supplies, which have extremely long delivery times due to their complexity. The shortage is very low in the supply chain, causing a ripple effect throughout the network.

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

Research firm IHS Markit expects 672,000 fewer vehicles to be produced in the first quarter of 2021 due to the shortage of semiconductors, including 250,000 units in the world’s largest vehicle market, China.

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

“Because the cause of these restrictions is the result of increased demand from OEMs and limited supply of semiconductors, it will not be resolved until the two forces are aligned,” said Phil Amsrud, chief analyst at IHS Markit for advanced driver assistance systems, semiconductors. and components.

One of the most affected car manufacturers is Ford. This week was forced to significantly reduce production from its F-150 collection this week, which is fundamentally important to the company’s profits. Ford said it works closely with its suppliers to buy the chips, which are exclusively exclusive to the collection and cannot be replaced by those of lower-priced vehicles.

This is different from GM, the city’s rival. The Detroit automaker has temporarily halted production of three car and crossover plants in North America at least in mid-March. The effort aims to prioritize the production of its larger full-size vans 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, who supply chips for their products from smaller and more focused chip manufacturers such as NXP Semiconductors or Renesas.

A disruption of the supply chain during any part of the process can have a major effect on the entire production.

“This is a classic example of the bullwhip effect,” said Razat Gaurav, CEO of software and analytics firm Llamasoft. “Small changes in demand, as they spread higher up the value chain, variability and volatility grow dramatically.”

Much of the problem starts at the bottom of the supply chain which includes “wafers”. The wafers are used with the small semiconductor to create a chip that is then placed in modules for steering systems, brakes and entertainment systems.

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

The origin of the shortage dates back to early last year, when Covid caused rotating shutdowns of vehicle assembly plants. When the facility closed, suppliers of wafers and chips diverted the parts to other sectors such as consumer electronics, which were not expected to be so affected by home orders.

“These chip makers and wafer makers began to redistribute their ability to like consumer electronics, which was growing because of people working from home and virtual work patterns,” Thai-Tang said. during an investor conference last year. “Fast forward, if you add 26 weeks to when they made those decisions, the decline or scope of supply began to affect the automotive industry in the second half of last year, moving into the first quarter.”

But demand for new vehicles was tougher than expected during the shutdowns, especially from consumers, so the industry recovered much faster than anyone expected. As it happened, chip suppliers continued to divert automobile resources and try to catch up with the demand of the auto industry.

“There is no easy way out,” 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 establish safety protocols, they could go back into production. Now that’s not the case. We have very long delivery times and we have more and more demand for chips.”

– CNBC Lora Kolodny contributed to this article.