The ongoing global shortage of semiconductor chips has had a severe effect on automotive manufacturing and sales since 2020. This comprehensive guide examines how the chip crisis arose, the many repercussions across the auto industry, how long the issues may persist, and what the future implications may be.
What Led to the Devastating Chip Shortage?
The automotive chip shortage emerged from several converging factors:
- Surging chip demand from multiple sectors — IT hardware, consumer electronics, and telecommunications industries were undergoing rapid growth and gobbling up global chip fabrication capacity before and during the pandemic.
- Supply chain disruptions — Factory shutdowns and logistics bottlenecks resulting from COVID-19 severely constrained supply chains and chipped away at inventories.
- Weather events — Drought in Taiwan and winter storms in Texas impaired production at major semiconductor fabrication plants in 2021, squeezing capacity further.
- Overly lean inventory management — To reduce costs, many automakers relied on just-in-time chip delivery, keeping only 1–2 weeks of inventory on hand rather than stockpiling. This left OEMs highly exposed when shortages hit.
The combination of soaring chip demand with crippled supply chains and inventory buffers depleted to dangerously low levels sparked the severe auto chip drought.
Dramatic Impacts of the Shortage on Automotive Industry
The global chip deficit has detrimentally impacted automakers, dealers, and car buyers:
Millions of Vehicles Cut from Production Schedules
- Automakers have been forced to make steep cuts to vehicle production schedules, forecasting roughly 10 million fewer vehicles built globally in 2022 versus pre-shortage levels.
Inventory Levels Have Plummeted
- Dealer lots sit nearly empty, with average new car inventories dropping below 20 days’ supply in mid-2022 — an unprecedented low. This is around a third of normal stock.
Buyers Face Limited Selection and Long Waits
- Consumers have far fewer vehicle choices and often wait months for delivery as supply trickles in. Popular models can sell out instantly.
Automakers Are Taking Drastic Steps to Cope
- OEMs have reconfigured vehicles to remove non-essential electronics and reprogrammed ECUs to use alternate chips when possible.
- Many have prioritized high-margin trucks and SUVs over cars to maximize limited chip supply.
- Model launches have been delayed and production suspended at some plants.
Car Prices Continue Rising
- Showroom prices keep climbing as demand outpaces constrained supply, with buyers paying thousands over MSRP for in-demand models.
The automotive chip famine has created a desperate scenario of depleted dealer lots, long waits, and little price relief for nearly two years and counting.
How Much Longer Could the Auto Chip Shortage Last?
Predictions on when the semiconductor shortage might ease span from later 2022 into 2024 as the situation remains dynamic:
- Intel CEO Pat Gelsinger expects the shortage to persist into 2024 as demand continues outpacing supply.
- IHS Markit analysts project gradual improvement over 2022, but full equilibrium between supply and demand may not arrive until early 2023.
- VW CEO Herbert Deiss forecasts shortages continuing through the end of 2022, impacting production rates.
- Some analysts speculate resolving backlogs of orders for chips and production equipment could take up to two years.
Though short-term chip delivery is improving slightly, it appears automakers will continue wrestling with inadequate semiconductor supplies for the foreseeable future.
Are Any Long-Term Solutions on the Horizon?
Increasing production capacity and improving supply chain resilience will be key to avoiding future shortages:
Ramping Up Fabrication Capacity
- Major chip makers like Intel and Samsung are investing billions to build new semiconductor fabrication plants in the U.S. and globally that will significantly boost output down the road.
Diversifying Supply Chains
- Automakers seek to reduce overreliance on a small number of chip manufacturers by broadening their supplier base. This limits exposure to one region.
Increasing Stockpiles
- OEMs now aim to keep a minimum of 4–6 weeks of chip inventory in reserve at all times versus the previous 1–2 weeks. This provides a buffer against short-term disruptions.
While the chip drought persists at least into 2023, these strategies over the next 2–4 years should improve resilience and help avoid recurrences of such extreme shortages.
What Are the Wider Implications for the Auto Industry?
The shortage illuminates risks auto companies must now urgently address regarding:
Overdependence on Limited Suppliers
- Single sourcing critical components like semiconductors leaves automakers highly vulnerable to disruptions, as the shortage revealed.
Inflexible Manufacturing Processes
- Heavily automated assembly lines with zero buffer inventory of parts have little room for pivoting when shortages strike. Production grinds to a halt.
Strained Relationships with Dealers
- As inventory dried up, OEMs channeled the few vehicles built toward their most profitable dealers at the expense of others. This will have lasting effects.
Accelerated Technology Investments
- To reduce long-term chip reliance, automakers are hastening R&D into technologies like software-defined vehicles and chip design.
This unprecedented supply shock has exposed how brittle and susceptible to disruption automotive manufacturing and logistics networks have become after years of efficiency obsession. Difficult lessons have been learned that will reshape strategies moving forward across the entire auto sector.
In summary, the severe automotive chip shortage sparked by the pandemic appears likely to persist at least into 2023, continuing to disrupt vehicle production, sales, and pricing for the foreseeable future until crucial capacity expansions and supply chain adjustments help rebalance the semiconductor market.
FAQs
How many cars have been lost due to the chip shortage?
The global chip shortage has caused the automotive industry to lose more than $200 billion in 2021, and 7.7 million vehicles were not produced due to the shortage.
What is the reason for the chip shortage in the auto industry?
The chip shortage in the auto industry is due to several factors, including the COVID-19 pandemic, factory shutdowns, and disruptions in consumer demand. The auto industry relies on a growing number of electronics, and as cars become smarter, they require more microchips. However, the industry only uses 5% to 10% of annual semiconductor production, with most chips going to consumer electronics.
When will the chip shortage end?
The chip shortage is expected to persist for some time, with some experts predicting it could stretch into 2023. Automakers and chip firms have differing outlooks on when the chip shortage will end, prolonging uncertainty about the industry’s recovery from the pandemic.
How is the chip shortage affecting car prices?
The chip shortage has caused production slowdowns, leading to fewer cars being available for consumers to purchase. This has resulted in higher prices for both new and used cars, making it more difficult to buy a car.
What are car manufacturers doing to deal with the chip shortage?
Car manufacturers are taking several steps to deal with the chip shortage, including ordering surplus semiconductors, prioritizing production of high-demand models, and reducing the number of features in some models to conserve chips. Some manufacturers are also exploring alternative sources for chips, such as using chips from different suppliers or developing their own chips.
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