How Covid led to a $ 60 billion global chip deficit for automakers

Automakers around the world are expected to lose billions of dollars in revenue this year due to a shortage of semiconductor chips, a situation that is expected to worsen as companies compete for supplies of the critical parts.

Consulting firm AlixPartners expects the deficit to reduce $ 60.6 billion in revenues from the global auto industry this year. That conservative estimate spans the entire supply chain – from dealers and auto manufacturers to large Tier 1 suppliers and their smaller counterparts, according to Dan Hearsch, a general manager of the New York-based company’s automotive and industrial practice.

“All the way up and down the supply chain, everyone has lost some of the money,” he said. “This could be 10% of global demand this year, the impact of which is shrinking the recovery. We don’t think we’re exaggerating this.”

General Motors expects the chip shortage to cut its revenues by $ 1.5 billion to $ 2 billion this year. Ford Motor said the situation could cut its revenues by $ 1 billion to $ 2.5 billion by 2021. Honda Motor and Nissan Motor together 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 infotainment systems and more basic components such as power steering and brakes. Depending on the vehicle and options, experts say a vehicle can have hundreds of semiconductors. Higher vehicles with advanced safety and infotainment systems have much more than a base model, including different types of chips.

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

One of the only outliers so far is Toyota Motor, which said Wednesday it has a whopping four-month supply of chips and did not immediately expect the global shortage to hit production, Reuters said.

Tesla CFO Zachary Kirkhorn told investors during the company’s quarterly results last month that the shortage and capacity of the shipping port “could have a temporary impact” on the automaker. In a public filing, the company said the impact of the shortage is “still unknown” as the unavailability of parts could impact production.

Automakers are rushing to get supplies of the chips, which due to their complexity have extremely long lead times. The shortage is deep in the supply chain and causes 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 the vehicles are available. Others have said they may want 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 car market, China.

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

“Because the cause of these limitations is the result of an increasing demand from OEMs and a limited supply of semiconductors, it will not be resolved until both forces align,” said Phil Amsrud, IHS Markit’s senior chief analyst for advanced driver assistance systems. semiconductors. and components.

One of the most affected car manufacturers is Ford. The company had to significantly cut production of its F-150 pickup this week, which is critical to the company’s bottom line. Ford said it is working closely with its suppliers to purchase the chips, which are largely unique to the pickup and cannot be replaced with those from cheaper vehicles.

That’s different from crosstown rival GM. The Detroit automaker has temporarily halted production at three auto and crossover plants in North America until at least mid-March. The effort aims to prioritize the production of its more profitable full-size pickups and SUVs, said CFO Paul Jacobson.

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

A kink in the supply chain during any part of the process can have a huge ripple effect in production.

“This is a classic example of the bullwhip effect,” said Razat Gaurav, CEO of supply chain software and analytics company Llamasoft. “Small changes in demand as they propagate further upstream in the value chain dramatically increase variability and volatility.”

Much of the problem starts at the bottom of the supply chain with “wafers”. The wafers are used with the tiny semiconductor to make a chip that is then stuffed into modules for things like steering, braking, and infotainment systems.

According to Hau Thai-Tang, Ford’s chief product platform and operations officer, it takes 26 weeks to build the chips before installing them in a vehicle.

The origin of the shortage dates back to the beginning of last year, when Covid caused a continuous shutdown of vehicle assembly plants. When the facilities closed, the wafer and chip suppliers rerouted the parts to other industries, such as consumer electronics, which were not expected to suffer as much damage from stay-at-home orders.

“Those chip makers and wafer makers began to rearrange their capacity to like consumer electronics, which grew through people working from home and virtual work patterns,” Thai-Tang said at an investor conference last year. “Fast forward, if you add 26 weeks to when they made those decisions, the drop or low in supply started to hit the car in the second half of last year as we entered the first quarter.”

But demand for new vehicles was more resilient than expected during the shutdowns, especially by consumers, so the industry recovered much faster than anyone expected. While that was happening, chip suppliers continued to divert their resources away from the automotive industry and try to respond to the demand from the automotive 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 were able to smooth the curve and put safety protocols into operation, they could go back into production. That’s not the case now. We have really long lead times and there is more and more demand for chips. “

– CNBCs Lora Kolodny contributed to this article.