Why the Semiconductor Shortage Must Drive Change in the Auto Industry

Editor’s Note: Geraint John, Vice President Analyst, Gartner Supply Chain

Automotive manufacturers sit at the center of a complex, highly integrated and heavily outsourced supply chain for semiconductors. While the auto industry has faced shortages of microchips before, the disruption this time is more significant due to the volume of chips required in today’s vehicles and because the supply chain has become more concentrated.

The impact of the shortage of semiconductors is significant. Leading OEMs such as Toyota, Ford, Volkswagen and Honda have been forced to halt production temporarily at several plants around the world. Lead times for some chips have tripled to as much as 40 weeks. And prices have risen by up to 15%. Forecasters predict that output of more than 1.3 million vehicles could be lost in 2021 as a direct result.

The shortage of chips is being driven by multiple factors, including:

• Reduced production by automotive chip makers last year as a result of COVID-19 induced shutdowns and a slump in demand for new cars and trucks.
• A faster-than-expected rebound in global vehicle sales in the latter part of 2020 and into 2021.
• Surging sales of the latest 5G smartphones, laptops and the new generation of PlayStation and Xbox gaming consoles, which have sucked up spare capacity.
• Trade restrictions imposed by the Trump administration on Huawei and top Chinese chip maker Semiconductor Manufacturing International Corporation (SMIC).

As more high-tech features are added to vehicles and demand for hybrid and all-electric vehicles accelerates, the volume and sophistication of chips required will increase. The looming question then is, can the automotive giants raise their game or will they, like their peers in other traditional sectors, fall victim to nimble new innovators such as Tesla in this high-tech future? To do so, supply chain leaders must seize the opportunity to develop a longer-term, multisource investment strategy for resilience that minimizes the impact of future disruptions.

Complexity Spans The Ecosystem

Auto OEMs don’t typically buy semiconductors directly; instead, they purchase subassemblies from Tier-1 suppliers who, in turn, buy from specialist automotive chip makers. In recent years, these Tier-2 firms have increasingly turned to contract manufacturers, because of the high capital costs involved in opening new wafer fabrication plants (“fabs”).

The Tier-3 level of this ecosystem is dominated by Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip maker, which produces around 70% of automotive microcontrollers, according to IHS Markit. However, automotive accounts for only 4% of TSMC’s annual revenues, compared with 49% for smartphones and 30% for PCs, tablets, servers, base stations, games consoles and other high-tech products.

Although TSMC says it will invest a massive $28 billion in new capacity in 2021, it will be several years before this is fully online. In the meantime, the auto industry is scrambling to find short-term solutions, which are extremely limited given current lead times and capacity constraints. This includes lobbying the Taiwanese government to put pressure on TSMC to prioritize supplies to the sector.

Deep Structural Changes Are Needed

The global automotive semiconductor market is forecast to grow by around 7% annually over the next few years, further increasing the dependence of automakers on a largely Asia-based electronics supply chain — one in which they are relatively small players.

This scenario, combined with the shift of power to ever-larger Tier-1 suppliers, means that auto OEMs cannot simply dictate terms as they did in the past. Supplier relations may have improved somewhat, but brand owners will need to take collaboration to a whole new level if they are to successfully navigate their way through the fundamental transformation of their industry.

Gartner research among more than 1,300 supply chain professionals in late 2020 found that automotive was the sector least likely to be investing in more collaborative relationships, both upstream and downstream, to achieve greater resilience and agility. The high-tech industry has had more success in managing suppliers and could serve as an example for automotive, although high-tech too is starting to suffer from chip shortages despite having built up bigger stocks and having longer-term contracts.

Building a Network of Trusted Suppliers

Instead of just seeking to lock in their own supply, OEMs need to make bold moves that build trust and improve coordination across the entire supply network. These include:

• Moving away from the current short-term sourcing cycle for semiconductors and locking in capacity via longer-term contracts. Direct volume commitments from OEMs and framework contracts to support their model platforms through Tier-1 suppliers will drive confidence in in-house capacity investments at Tier 2.
• Developing cooperative arrangements with rival OEMs and key suppliers to pool demand and collectively seeking more attention from the big chip manufacturers.
• Working with industry bodies, government agencies and key suppliers to attract new entrants into the auto sector, especially outside the Asia-Pacific region. The executive order signed by President Biden last month could help in this effort to decrease US supply chains’ reliance on the region.

The hierarchical and adversarial history of the auto industry sits uncomfortably with the need to nurture an expanded ecosystem for semiconductors, as well as other key components such as batteries that will power the next generation of products.

The chip shortage facing automotive manufacturers will be ongoing - through the second half of 2021, if not beyond. Instead of just a short-term reaction, this disruption needs to spur a longer-term and more collaborative response within the industry. This must include both structural and cultural changes in how OEMs engage both existing and potential technology suppliers, including innovative startups, to increase collaboration to secure capacity and augment the resilience of their supply chains.

SC
MR