Carmakers hoarding semiconductors risk prolonging the chip shortage

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    By Wale Azeez  •  Updated: 13/07/2021

    Growing mistrust between carmakers and the semiconductor industry in the wake of the global chip shortage is causing a “mismatch” between demand and supply expectations that could prolong the crisis, automotive industry watchers have warned.

    The chip drought has triggered a power shift in favour of suppliers, enabling them to make stricter contractual demands on carmakers as the auto market recovers from last year’s slump, experts told Euronews Next.

    Researchers said carmakers keen to make up their chip inventory shortfalls have been inflating orders to suppliers already struggling to service multiple industries in what they are calling the “toilet paper effect,” likening the process to the panic buying witnessed during the early stages of the COVID-19 pandemic.

    Some analysts who have forecast total car production for 2021 at between 83 million to 85 million units foresee only enough capacity in the semiconductor supply chain to meet 85 to 90 per cent of that demand by the end of the year.

    Suppliers can’t meet orders
    “The problem we see though, is that the orders for chips in terms of cars are far above this level of 83, 84, 85 million cars,” said Jeremie Bouchaud, director for the Autonomy, Electronics & Semiconductor service at IHS Markit.

    “What we continue to hear of are orders more in the range of 100 to 110 million units. We even heard from one tier two [supplier] telling us they saw orders amounting to the equivalent of 132 million cars.”

    “There is definitely an inflation of the orders and the demand for various reasons, for the chips. Orders for refilling inventories were needed but there is still a little bit of what we call the ‘toilet paper effect’ where OEMs [carmakers] and tier one suppliers who don’t get all of the chips they need then begin to order more – just in the hope of getting what they need”.

    He said that for this reason and because suppliers cannot realistically meet such orders currently, automotive chip shortages were likely to extend beyond this year.

    Research by Fitch Ratings found the global chip shortage will prevent a total of around 3.8 million cars being made in 2021, 5 per cent of total annual output. Lost European car production represents a third of that.

    The situation led Volkswagen CEO Herbert Deiss to describe his company, the world’s second largest car maker by sales, as being in “crisis mode” in May, when the company warned that the chip shortage would hit profits in the second quarter to June 2021.

    A buyer-to-supplier power shift is underway
    Relations between the two sectors are also experiencing a power shift that started when semiconductor suppliers were forced to focus on other industries.

    While automotive began to shut down in the first half of 2020 as the COVID-19 outbreak took hold, computing, consumer electronics and communications experienced unprecedented chip demand – and suppliers were happy to oblige.

    Now, with demand for cars – and automotive chips – rising again, carmakers find themselves at the back of a global queue and with less influence over suppliers than they had prior to the pandemic. The likes of Volkswagen are seemingly as much in competition with Apple and Sony as they are with BMW.

    Phil Amsrud, senior automotive analyst at IHS Markit, told Euronews Next that it “could be premature” to say that the balance of power had changed, but agreed that relationships were definitely in a state of flux.

    “The semiconductor suppliers are now requiring longer ‘firm order’ windows – from three months increased to 12 to 24 months – and in some cases prepayment to accept orders,” he said.

    “The suppliers are hopeful this will result in semiconductors being seen as more strategic than most other components and therefore treated differently. The OEMs’ response will determine if the balance of power has changed or is still evolving. Regardless of the final outcomes, things are changing however”.

    He added that the forthcoming cycle of annual contract negotiations should also be an indication of whether things had changed much in the relationships between the carmakers and the rest of the semiconductor supply chain.

    Car sales and prices on the rise
    Meanwhile, global car sales are on the rise again. Prices are increasing too, as supply struggles to meet pent-up demand.

    But sales, particularly in Europe, have still not returned to pre-COVID-19 levels, seeing less of a rebound compared to the US and China.

    Between January and May this year, the demand for new cars within the EU rose by 29.5 per cent to reach 4.3 million newly-registered units in total, according to the European Automobile Manufacturers Association (ACEA).

    May’s passenger car registrations in the EU rocketed by 53.4 per cent compared to last year, with a total of 891,665 units. But these were still well below the 1.2 million cars sold in May 2019.

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  • #159077 Reply

    guessing car makers, who are huge companies maybe should start their own chip companies; or buy one out

    • This reply was modified 1 week, 3 days ago by struth.
    #159105 Reply

    Tech Britain should be making our own semi conductors, too much reliance on Taiwan.

    #159107 Reply

    Diversification of the economy is important on many levels.

    #159145 Reply

    It’s the car makers own fault, they cancelled their chip orders, then looked aghast when they could not get them back, Not to mention pissing off the foundry by cancelling your order doesn’t exactly win you brownie points when you next come calling…

    Growth in 5G, automotive, and IoT shipments has helped keep pressure on the foundry market in ways industry experts didn’t foresee in 2005 or 2010, and that means there wasn’t much slack in the 200mm or legacy 300mm markets to start with. Then the pandemic hit, and car manufacturers cut their orders. TSMC allocated that capacity away to other companies. The car industry failed to understand it takes several months to make a microprocessor & didn’t give the foundries sufficient lead time to scale manufacturing back up.

    “Tech Britain” would pour millions billions into attempting to build our own semiconductors and fail miserably.

    Have a look at the costs and timescales in building and operating a semiconductor chip fab. TMC in the far east spent £10 billion on their last one and the next is rumoured to be £16 billion. Average time to build = 3-5 years.

    New fabs are being built, constantly. In 2016, there were 97 fabs building 300mm wafers, worldwide. Today there are 127. New fabs are always coming online. But fabs are built for many purposes and not all fabs build microprocessors. Some fabs build DRAM and NAND instead of logic.

    In life, it's not who you know that's important, it's how your wife found out.

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