01.07.2019

The economic slowdown due to the 2020 COVID-19 pandemic pushed down vehicle sales volume for the year in North America and Europe with -14.5% and -24.5% respectively. The corresponding decrease in production volumes, pushed automakers to idle plants and subsequently decrease orders of microchips and other electronic components due to uncertainties on the timing and volume of sales and production recovery. These factors conspired to push electronic components manufacturers to shift a greater share of production to serve adjacent and resilient demand from personal IT and consumer electronics driven by the lockdowns and home office trends.

As car demand began to ramp back up in the second half of 2020, demand for semiconductors in the auto industry began to rise. Vehicles produced in major markets require about 100 ECUs, with the increase in infotainment systems, ADAS features, and xEV powertrains. The current shortage applies to all existing electronic applications down to the core vehicle function being the engine management system.

Carmakers must adjust production output to the current microchip and semiconductor sourcing shortage that has pushed the usual 90 days lead time to now approximately 6 months because of the production increase required at electronic components manufacturers level.

 

Lack of inventories and competition from consumer electronics force temporary production cut for several OEMs

  • Many auto manufacturers including the “Big Three,” Volkswagen, Honda, Subaru, Nissan, Mazda and Stellantis expect to cut production in Q1 with about 171,000 vehicles impacted by the souring shortage in North America, according to LMC Automotive.
  • Automotive manufacturers have responded differently. Ford for instance plans to drop from a three to one shift schedule during one week for the best-seller truck F-150, and to idle production for two CUV plants for both the Escape/Corsair and the Explorer/Aviator.
  • GM has asked suppliers to stockpile a year’s worth of chips and build inventory. Additionally, they will require plants to be idled for the Chevrolet Malibu, Equinox and Trax, the Cadillac XT4, the GMC Terrain, and the Buick Encore.
  • Hyundai has been able to avoid idling any of their global plants as the company did not preemptively cancel any chip orders in early 2020, and Toyota seems to be less affected due to a tight forecast management and constant communication with electronic component suppliers.
  • Microchip manufacturers in Taiwan have agreed to prioritize automotive capacity after being asked by European governments. Taiwan Semiconductor Manufacturing Co (TSMC) stated it is expediting critical automotive products.

Securing the supply-chain and sourcing relations for an adjusted approach

  • Automakers must secure resource planning and purchasing for components that are shared with other industries as suppliers such as China Resources Microelectronics said it will reallocate capacity to maximize profits and secure supplies for its core customers and strategic partners. In the meantime, Taiwan chip makers consider a 15% price hike for automotive applications, which could take effect in late February.
  • Reshoring capabilities is unlikely as the ecosystem for microchips, semiconductors, and other electronics are all located in South East Asia and China.
  • Additionally, given the increase in semiconductor content with new software and hardware architectures driven by ADAS and electrification, automotive manufacturers may reevaluate their supply chain and develop closer and more secure relationships with chipmakers.

Carmakers will reduce production to build inventory while negotiations are ongoing to allocate more chipset production to the automotive industry. The capacity constraints could persist until the third quarter of 2021, making it difficult to fully recover the production loss in Q4 alone. As carmakers cope with supply shortage and are forced into production cuts, the industry could see a 2% production loss this year on a global perspective compared to the current forecast, even if demand remains steady.

Ducker’s Automotive team is at the forefront of key trends impacting the industry amid COVID-19 disruptions. Visit here for the latest insights and implications for global business, or contact us to connect with a team member.