When will the volatility in the auto industry come to an end?
Are you on a waiting list for a brand new car? For me, it’s been 10 months and counting. Browsing the secondhand market paints a similar picture, used cars are priced almost as high as the new ones.
We’re not alone. Delays in car deliveries have been affecting consumers all over the world since the pandemic started. COVID-19 has wreaked absolute havoc on the auto industry leading to a shortage of cars and it will take some time until things get back to normal. Since there is a continuous imbalance between supply and demand, experts predict that the shortfall will continue into 2023.
The global micro chip shortage is at the heart of the auto industry’s problems slashing manufacturing output. This is not slowing down any time soon, as the biggest microprocessor manufacturers on the planet such as Intel and Taiwan Semiconductor Manufacturing Company (TSMC), are struggling to ramp up production to keep up with demand. Worker shortages and heightened materials and energy costs have only added fuel to the fire.
How did the crisis in the auto industry begin and what has been fueling it?
- First, when the pandemic started, car manufacturers began to temporarily shut down their manufacturing facilities to prevent the spread of the virus among the workers. At the same time, they started to scale down production in anticipation of the decrease in demand for cars.
- Second, as curfews were put in place and people started working from home, demand for computers, laptops, tablets started to increase significantly. Many other technology companies such as Zoom, Docusign, Slack for example, thrived in the pandemic because they facilitated work from home and allowed people to perform their duties remote. Big streaming platforms and online content providers such as Netflix, Disney+, Amazon Prime saw a significant increase in demand for their services since people started spending more time at home. All these technology companies and many other software as a service providers that saw a significant increase in demand for their services during the pandemic run on servers. As a consequence, technology giants Amazon, Microsoft and Google had to expand their data centers as demand for cloud computing services skyrocketed and will continue to do so in the future. These companies require huge amounts of semiconductors for their data centers. Therefore, we saw a shift in the supply of semiconductors from the auto industry into the technology space. There are more details published in a study by McKinsey & Company here.
- Third, as ports reduced their capacity to process products flowing through at the beginning of the pandemic, they became very congested as the global supply chains started to recover. Hence auto parts took longer to get delivered from the suppliers to the manufacturing facilities. Also, on March 23rd 2021, the vessel Ever Given was caught in a sandstorm in the Suez Canal, blocking all traffic through the canal for 6 days, adding more delays in deliveries all over the world. More details about the Suez Canal blockage can be found here.
What can we do about it?
As demand for cars started to pick up again, auto manufacturers started to slowly increase production, as they tried to get back to pre-pandemic levels. Modern cars are computers on wheels; therefore, they require lots of microchips to function. Since the supply for chips is limited, auto manufacturers face significant back logs and it will take time to level up the demand for microchips with the supply. Intel and Taiwan’s TSMC are currently working on building new microchip facilities to ramp up manufacturing. But these facilities are capital intensive, they will cost billions of dollars to build and it will take time until they are fully operational. Microchip manufacturing capacity is increasing steadily, but not at the pace that the industries mentioned above require to keep up with demand.
The US government passed the US Innovation and Competition Act (USICA) (S.1260), committing to spending $52B for the domestic semiconductor research, design and manufacturing provisions, in an effort to revitalize the semiconductors industry in the US as they recognize its vital importance to the future. The European Union is also working on building its own microchip manufacturing capability to reduce its dependence on the Asian manufacturers.
Conclusion
The semiconductor shortage will most likely persist in the short term because of the complexities associated with the manufacturing process. And while demand will surge as the planet emerges from lockdown, it will take time to build new facilities and implement production flows. At the same time the requirements are more and more complex. Supply and demand in the auto industry will level up at some point, but it will still take some time. According to Forrester, this crisis will last throughout 2022 and into 2023.
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