The automotive industry and its value chains are suffering from the ongoing semiconductor shortage, as well as the pandemic (In this article, you will find all you need to know about the consequences of the bullwhip effect).
Vehicle production has taken a toll due to an unprecedented shortage of computer chips – an essential component of modern cars – while the supply chain disruptions from the COVID pandemic have compounded the issues.
Analysts believe that the majority of the most troubling shortages will begin to alleviate in the first or second quarters of 2022.
Like many current global challenges, this shortage initially began as a result of the COVID pandemic. Many automakers cut output and cancelled their chip orders earlier in 2020 in anticipation of low sales due to the pandemic. In addition, plants were closed and production halted to prevent the virus from spreading among workers. That was followed by an abrupt rebound in demand for cars, but chip supply could not keep up. This has led to global shortages that have now trickled down to most industries with wait times for new chip orders stretching to mid-2022.
Automobile manufacturers, in particular, have had a particularly difficult time obtaining these chips. Why? Semiconductor manufacturers are prioritizing manufacturers of smartphones, video consoles and other consumer electronics because they are often more profitable customers.
While a modern car can easily have up to more than 3,000 chips, cars account for a tiny share of chip demand. For instance, carmakers generated only 3 per cent of TSMC’s (Taiwan Semiconductor Manufacturing Company) sales last year. By contrast, chip sales from smartphone makers account for half of the company’s revenues. TSMC is the world’s biggest chipmaker, responsible for 24% of the world’s semiconductor output in 2020.
Due to the effect of these shortages, automobile manufacturers have temporarily ceased manufacturing. Ford, Honda, and General Motors have all cut production at some assembly plants. Toyota recently announced that it would slash worldwide vehicle production because of the chip shortage, and Volkswagen also indicated it would curtail output. In addition, the semiconductor crisis has forced automakers to idle some capacity to prioritize building profitable models. Others like Nissan and Renault have cut back on functions and features to keep production going.
Another cause of supply reliability problems in the car industry relates to product design. Most car designs take 3-5 years to go from initial concept to consumer-ready production units. However, the lifespan of many electronic components is very short – it can range anywhere between 2 to 3 years. This means that the components that are chosen in the design of a new vehicle risk being obsolete by the time it comes out of production. Thus, component obsolescence is a major issue for car manufacturers and must be managed right at every stage of production to minimize disruptions.
The automotive supply chain has always been the most resilient due to its just-in-time (JIT) manufacturing. For most of its history, the industry has relied on a distinct approach to buying car parts, procuring components from suppliers right at the moment they’re needed. Pioneered by Toyota in the 1960s, the just-in-time strategy enables carmakers to streamline production and eliminate the costs of keeping surplus inventory.
But the electronic component crisis has exposed not only the shortcoming of this system, but also how vulnerable it is to disruptions. While JIT has served the industry well, helping it organize a system for sourcing the tens of thousands of components that go into a modern vehicle, it hasn’t worked for semiconductors. This is because, unlike other components that may only require a few days to make, computer chips are created in a process that takes months. And building and equipping a factory to produce them requires years.
There’s no way to prevent a disruptive event such as the chip crisis from occurring. Nonetheless, companies can take smart steps to prepare for and deal with them – and, in the process, ensure business continuity. One way to build resilience into business operations is by creating redundancies throughout the supply chain. For example, the company could hold extra inventory to avoid stockouts, use multiple suppliers for components or maintain low-capacity utilization to prevent economic slowdowns. Furthermore, if a product has gone obsolete then it may be possible to locate some surplus stock - possibly a product manufacturer has over bought and needs to release the capital invested. Another approach is to build strategic partnerships to secure the electronic components supply chain: the agreement between Stellantis and Foxconn is something that will help to achieve that.
AIRENC helps OEMs balance the lean JIT model with very practical risk mitigation. Through the AIRENC peer-to-peer transaction platform, we ensure that no member (OEMs and EMS) is left without the components they need during shortage or crisis. Our platform enables companies to source critical components from a community of vetted vendors in order to stabilize their supply chain. Care is taken to ensure that the component is genuine and has an adequate pedigree, i.e., it is not from a non-traceable source.
In addition, AIRENC facilitates seamless collaboration and information sharing among supply chain partners. Companies can gain real-time insights on demand signals and respond to any disruptions quickly by leveraging their connections on the platform. To that end, we help OEMs and EMS companies to better assess electronic components trends and adapt to unforeseen shifts in the market more effectively.
It’s not enough for companies to put effort only into mitigating today’s risks. Today, companies must implement various strategies as a way to prepare for and deal with supply chain disruptions. A peer-to-peer transaction platform like AIRENC helps you to build redundancies, foster supply chain collaboration and improve demand forecasting, thus limiting the impact on business operations.