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26 January 2021

Automotive and consumer electronics vye for scarce semiconductors

Auto makers have been hit by a shortage of semiconductors occasioned by two converging factors – failure to forecast a sudden resurgence in demand towards the end of 2020, and a boom in sales of CE (consumer electronic) devices such as tablets, laptops and gaming consoles throughout the Covid-19 pandemic. The two factors combined meant that semiconductor makers had reconfigured their facilities towards those CE devices, without leaving scope to ramp up manufacturing of dedicated automotive components quickly.

That failure to forecast the uptick resulting from pent-up demand after sales had slumped early in the pandemic seems to be a collective one across the whole automotive sector, appearing to have hit all the big OEMs about equally. It also means that the semiconductor shortage is focused chiefly on the automotive industry, even if there are some more isolated supply chain disruptions in other sectors.

Naturally, auto makers anticipated a tough period as soon as the pandemic precipitated lockdowns and disruption in key markets. In the event, the rebound in demand later in 2020 at first came as a pleasant surprise before they realized that the very failure to anticipate that meant they would not be fully able to exploit it.

The earlier boom in demand for CE products such as Sony PlayStations and Dell laptops, among others, had sucked up the semiconductor making capacity at foundries such as TSMC of Taiwan.

So Toyota has shut down production lines in China, where Volkswagen has also warned of manufacturing problems at factories in a country whose economy is the only major one to have expanded over 2020. Volkswagen is also suffering from the shortages in Europe and the USA, while Fiat Chrysler has temporarily ceased production at plants in Ontario and Mexico. Then Ford suspended production at a factory in Kentucky for a week.

Apart from the unique market dynamics wrought by the pandemic, the chip shortage has also been exacerbated by longer term trends within both the automobile and semiconductor industries. On the automotive front, the longer term disruptor is the growing dependence of vehicles, especially cars, on ever more sophisticated electronic subsystems such as computerized transmissions and collision avoidance, as well as displays and built-in wireless connections, alongside a proliferating array of sensors. Irrespective of when autonomous driving becomes a reality, the car will become increasingly connected and consume a growing number of chips.

This has been confounded by the tension within global supply chains as automotive OEMs pursue JIT (just-in-time) assembly, with inventories kept as low as possible to minimize costs. This exposes them to short term fluctuations in availability of semiconductor products, as well as other components, even given meticulous planning to reduce these risks, which does not always appear to have been executed.

Semiconductor makers, and especially the big foundries, are addressing the problem, but it will take time to rebalance production and bring extra capacity on stream. TSMC, the leading foundry, has pledged $28bn in capital spending for 2021, partly to develop more advanced chip making capability, but also to address the specific shortages of automotive chips.

Semiconductor manufacturing has itself been running close to the edge of capacity and the recent supply chain problems can be partly attributed to the expanding restrictions against China’s technology sector that came into being during the last two years of the USA’s Trump administration. As actions originally focused largely on Huawei extended to China’s own chip industry and particularly its largest foundry, SMIC, the ramifications rippled through the global supply chain, with the current shortage almost an unintended consequence.

As a result, impact of the semiconductor shortage has not been entirely confined to the automotive sector. Semiconductor firms have had to cope with continuing high demand for CE products as car manufacturing ramped up and inevitably some prices have risen as a result, so there has been pressure on prices of various CE products. That shock will probably be absorbed by CE makers without passing on these price rises to consumers if the chip shortage resolves itself quite quickly.

One thing is certain though – the roll-out of 5G globally will increase demand for semiconductors across all relevant sectors, including automotive, and that will require sustained growth in foundry capacity.