China’s car market staged a dazzling recovery in the second half of last year, but it has come at a heavy price.
The rebound has left companies including Volkswagen, General Motors and Honda facing a shortage in chips as a lockdown-driven boom in games consoles, laptops and televisions sends demand for semiconductors soaring and threatens to overwhelm chipmakers.
Fiat Chrysler was one of more than a dozen carmakers forced to idle plants this year as contract chipmakers in Taiwan and China were caught off guard by the multipronged surge in demand.
With workers having to be furloughed, car executives are seeking government help in a bid to see if the supply of chips — that do everything from controlling power steering to anti-lock brakes — can be accelerated.
“I am here to protect the fact that my company is treated fairly,” Carlos Tavares, chief executive of Stellantis, the newly merged Fiat Chrysler and PSA, told the Financial Times. “I will look for all possible solutions. If I need to I will fight back [to ensure its chip contracts are met],” he added.
As the might of the carmakers confronts the power of consumer electronic companies, the crisis is also putting the motor industry’s ever-increasing reliance on chips — and their complicated supply chains — under the microscope.
Given that just 10 per cent of semiconductor fabrication plants are used for automotive parts, carmakers do not wield the same negotiating clout as consumer electronics giants. With no immediate fix available, the shortage is expected to last at least six months.
The production of more than 280,000 vehicles has already been put on ice, according to data provider AutoForecast Solution. IHS Markit forecasts that as many as 500,000 vehicles could ultimately be affected.
While it has left the car industry on the back foot, it also comes at a period of upheaval for chipmakers. California-based Intel, which this month appointed a new chief executive, is trying to regain its crown as the leader in advanced chipmaking that it ceded to Taiwan’s TSMC.
TSMC, meanwhile, is grappling with the fallout from US sanctions against Chinese telecoms group Huawei and chip giant Semiconductor Manufacturing International Corporation (SMIC).
“The sanctions meant some clients redirected their orders from SMIC to other places, such as TSMC,” said a China-based chip supplier. “Inside the industry, we are all pretty panicked, because the scope of the chip shortage is too big, and affects too many types. In the short term, we can’t see any way of resolving it.”
Although chipmakers have faced capacity constraints before, industry analysts say this crunch is made worse because the groups have little incentive to invest in extra capacity for the lower-margin chips used in laptops and televisions, and that have been in high demand during lockdowns.
Instead, meeting demand for higher-margin chips critical for 5G networks, data centres and the new gaming platforms launched by Sony and Microsoft late last year is far more attractive.
“Everything is run so tightly in semiconductor fabrication plants that you always get this issue when there is a demand surge especially after a downturn,” said Richard Dixon, senior principal analyst at IHS Markit.
As carmakers try to ensure that the chips they do have are used in their most important and profitable vehicles, such as pick-up trucks, chipmakers are vowing to fix the problem.
Peter Altmaier, Germany’s business minister, wrote last week to his Taiwanese counterpart Wang Mei-hua, urging her government to intervene. In a letter seen by the FT, Mr Altmaier appealed for help in convincing TSMC to prioritise German carmakers, whose recovery, he argued, was of importance to the entire global economy. TSMC has said it will make fixing the issue a priority.
Meanwhile, Netherlands-based chipmaker NXP and Japan’s Renesas Electronics said they were seeking to increase prices following the shortage and as raw material costs climbed. Swiss rival STMicroelectronics is also considering a similar move, according to a person familiar with the matter. STMicroelectronics declined to comment.
Complex supply chains
Not every carmaker has been afflicted in the same way. Toyota has escaped relatively lightly after the Tohoku earthquake and tsunami in 2011 prompted it to diversify its supply chain and hold more inventory.
Hyundai Motor, the world’s fifth-biggest carmaker, has avoided crippling shortages because it did not cancel any chip orders when the pandemic hammered sales and forced factories to shut in early 2020.
But most carmakers keep limited inventory, relying instead on “just in time” delivery of components to preserve cash. The number of intermediaries in the supply chain also varies, with some relying on their parts makers to secure chips, while others prefer to negotiate directly.
Markus Duesmann, the boss of VW’s Audi marque, said his company had relied on a “tier four” supplier for its semiconductors, and there was “a very long chain with different supply levels on the components that we are short”.
If the crisis has exposed the perils of forecasting demand during the pandemic, it also raises some troubling questions for a car industry whose fortunes are expected to become ever more dependent on chips as electric vehicles grow in popularity and autonomous driving develops.
Although they only make up 3 per cent of global car sales, the semiconductor content of electric vehicles is roughly three times more valuable than that of a petrol car, according to IHS Markit.
The changing nature of the technology in cars, say analysts, is likely to herald profound change in the relations between car companies and chipmakers. It is also expected to force semiconductor giants to rethink how they outsource parts of their manufacturing to suppliers in Asia.
“Once we get out of Covid, the real disruption we are going to see over the next couple of decades is how electrification and autonomy takes shape,” said Joseph McCabe, chief executive of AutoForecast Solutions, “After semiconductors, the next one is going to be potentially when we run out of rare-earth materials to make batteries. There is always that next thing that they have got to keep their eye on.”
The real disruption
Some carmakers and automotive chip specialists may decide to take more manufacturing in-house. In an effort to avoid a repeat of the crisis, Volkswagen said it was considering bypassing its large suppliers, such as Continental, to develop closer relationships with chipmakers themselves.
At the same time, possible new entrants to the car market, such as iPhone maker Apple, may seek to leverage their existing negotiating power in chips to gain an advantage, according to Mr McCabe.
There is also pressure building in China for semiconductor companies to produce their chips domestically after a shortage that began last month threatens strong sales of luxury cars and electric vehicles.
“This episode of chip shortages has once again shown how urgent and necessary it is to have autonomous and controllable supply chains,” said Chen Shihua, a senior official at the China Association of Automobile Manufacturers.
The squeeze has not so far led to any shortages in the supply of laptops and TVs, which rely on the IC chips (DDI) used to power electronics displays. But with plenty of countries facing prolonged lockdowns or restrictions, analysts warn that it may happen.
Even as more cracks emerge in chip supply chains, carmakers appear to have few options left but to wait their turn.
“It is a question of fairness and equality. Everybody will get their share,” said Ashwani Gupta, chief operating officer at Nissan, which has been forced to cut production of the Note, its new compact car, in Japan. “Everybody is adjusting their productions but we will come out of it soon.”
Additional reporting by Qianer Liu, Song Jung-a, Edward White, Kathrin Hille and Leo Lewis