![]() ![]() Companies in industries that do not follow a just-in-time ordering approach were in a better position, especially since some had secured extra capacity when automotive players canceled or reduced their orders. When vehicle sales fell in early 2020, OEMs and Tier 1 suppliers decreased their chip orders, leaving them low on inventory when demand began to recover. For instance, many OEMs and Tier 1 suppliers follow a “just in time” manufacturing strategy in which they order semiconductors and other vehicle components close to production to optimize inventory costs. And this means automotive OEMs and Tier 1 suppliers are increasingly competing with companies in other industries for chips.Īlthough the chip shortage is affecting many industries, the automotive sector has some unique characteristics that exacerbate the problem. ![]() Across almost all industries, the demand for semiconductors in 20 exceeded prepandemic forecasts (Exhibit 1). These market shifts have rippled back to affect demand for semiconductors and other components. The growth in working from home, for instance, has contributed to a greater demand for wireless connectivity and PCs. The high-tech sector, in particular, has seen sales volumes increase, partly because of changes wrought by the COVID-19 pandemic. While sales of all consumer goods plummeted in the first half of 2020, and automotive sales dropped precipitously-up to 80 percent in some locations-demand rebounded more than expected later in the year, continued to grow in 2021, and remains strong today. More than two years into the pandemic, the gap between chip supply and demand has widened across all semiconductor-enabled products. Factors behind the escalating challenges in semiconductor supply Companies can start by focusing on the implications of three critical activities that form the foundation for strategic shortage management: the creation of strong technology maps, reliable short-term demand planning, and guidance for long-term demand planning. Given the ongoing instabilities in the semiconductor supply chain, the automotive industry should consider refining its strategy. And yet another problem: OEMs have been unable to obtain critical vehicle components, such as wiring harnesses, and have reduced their production volumes in response, which has added even more uncertainty by decreasing demand for some semiconductor-based components. ![]() Another wrinkle: many semiconductors are transported by air, but transport costs have significantly increased while available shipping volume has dropped. 1 Peter Hobson, “London market greenlights Russia’s palladium while blocking its gold,”, MaKarvi Rana, “The Russian invasion of Ukraine to further cripple the semiconductor industry,” Logistics Insider, February 16, 2022. For instance, Ukraine supplies 25 to 35 percent of the world’s purified neon gas, and Russia supplies 25 to 30 percent of palladium, a rare metal used for semiconductors. Russia’s invasion of Ukraine has introduced further uncertainties to both the semiconductor supply chain and automotive demand. This strategy, however, may result in a shortage of lower-margin vehicles and could cause extreme fluctuations in demand for automotive chips. Some premium OEMs were able to safeguard profits with selective manufacturing and sales strategies designed to optimize margins. While manufacturers of laptops, white goods, and other devices have also cut production because of semiconductor shortages, the repercussions in the automotive industry have been more severe. The situation has worsened since then, and the recent drop in automotive revenues is largely occurring because OEMs and Tier 1 suppliers cannot procure sufficient quantities of chips and must delay vehicle production. We first explored the automotive chip shortage in a May 2021 article, noting that a quick fix was likely impossible. Although vehicle orders have surged to unexpected heights, a shortage of automotive semiconductors is forcing OEMs to close production lines or remove some popular features, such as heated seats, from their offerings. But for more than a year now, concerns have shifted to the supply side. During the earliest days of the COVID-19 crisis, automotive headlines focused on the huge drop in vehicle demand. ![]()
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