Although it looks like the world has finally got the upper hand fighting against the COVID-19, it is obvious that pandemic will have profound effects on the global economy and industry. At first, the companies were concerned about their workers’ health and safety, but very soon, the materials, parts, and component supply lines were interrupted, causing delays in production plans. Amongst the major industries affected by this, the automotive sector probably took the biggest hit. At the moment, all major car companies are in the midst of a significant semiconductor chip shortage which cripples the production plans, costing billions of dollars and forces the manufacturers to consider different strategies.
When the pandemic broke out in early 2020, most car companies shut down their production lines for weeks or even months, protecting their workers and obeying national quarantine laws. At that time, demand for new vehicles plumbed, and numbers of new cars sold in April of 2020 compared to the same month of 2019 were slashed by 47% on average. Such sharp decline forced car companies and dealers into “safe mode.” The feeling of uncertainty throughout the industry meant that new car releases were canceled or postponed, production targets were abandoned, and all manufacturing plans were put on hold.
However, the car companies forgot that they are highly dependable on parts and components suppliers, which were also affected by the pandemic. When the assembly lines stopped, and car companies decided to wait, thousands of automotive suppliers were faced with order cancelation and unsold stock. Among those suppliers, numerous factories from Asia produced electronic components and, most importantly, semiconductor chips. Faced with the lack of demand and uncertain future of their products, those factories decided to switch to producing consumer electronics. From the business perspective, that was an intelligent decision since the pandemic and global quarantine resulted in an astonishing rise in sales of smartphones, computers, tablets, and TVs. For most of 2020, people around the world needed entertainment more than they needed a new car. Although there is a significant difference between chips designed for use in vehicles and chips designed to be used in a gaming console, the electronic companies managed to switch in a remarkably short time and continue production with minimal delays. More importantly, change in the products was followed with lucrative and long-term contracts with the world’s leading tech companies, which replaced automotive contracts that were canceled or put on hold.
After the initial lockdown, which almost all companies decided to impose, the later part of 2020 proved to be much more promising. The sales numbers during the fall of 2020 were even better than the same period of 2019. The production was back to an average level, and the process was again safe with necessary health regulations. However, the cars produced in that period were assembled with the parts and component delivered before the pandemic started, which meant that car companies would soon run out of semiconductor chips. That happened in 2021, putting the car companies in a very awkward and problematic situation. The demand for new vehicles is enormous, but car companies simply cannot produce any vehicles due to chip shortages.
The importance of chips in the car industry is significantly greater than most people can imagine. First, the chips control every electronic system in the vehicle, from engine control modules to ABS braking and infotainment system. In modern vehicles, there isn’t a single process that isn’t controlled or monitored by a computer chip. This means that the average vehicle can have between 2,500 to 3,000 various chips installed. If we know that in 2019, all car companies combined produced astonishing 78 million vehicles, the number of chips needed is measured in billions. Even though the electronic factories didn’t completely stop making the automotive chips, the production is significantly reduced, and the shortage was inevitable.
As expected, the most prominent car companies are the most hit by the shortage, and despite high demand and reduced COVID-19 risk, companies decided to stop production for two to three weeks due to chip shortage. Of course, on such enormous scale every delay is very costly, and the expected costs throughout the industry are extremely high. Several consulting firms expect that the overall cost of chip shortage will exceed €100 billion in revenue for all global car manufacturers. Some companies even considered removing some optional extras from the cars like navigation systems of big displays to reduce the number of chips needed for production.
The representatives of electronic companies are optimistic and have already invested in production capacities which should be up and running in the following months. Most of them state that they will manage to satisfy the demand in the second half of 2021, which would mean that the car production will be stabilized by the end of this year. However, most CEOs of car companies are less enthusiastic, believing that the chip shortage will be an issue in 2022. Experts from IBM are the most cautious and predict that the first signs of stable chip supply will be in 2023, two years from now. Pessimistic predicaments like those are primarily based on the fact that even though the lockdown has passed, the demand for consumer electronics isn’t weakening and that chip factories need to double the production capacity in order to cover appliances and automotive production.
When global pandemic started, most analysts feared recession and a low demand. However as the economy remained stable, it’s the manufacturers who cannot supply due to the global shortage in semiconductor chips. Therefore, they will have to rely on solid partnerships to stay agile.