How Covid led to a $ 60 billion global chip shortage for automakers

Automakers around the world are expected to lose billions of dollars in profits this year due to the scarcity of semiconductor chips, a situation that is expected to get worse as companies struggle to supply essential parts.

Consulting firm AlixPartners expects the shortage to cut $ 60.6 billion in revenue from the global automotive industry this year. That conservative estimate includes the entire supply chain – from dealers and automakers to large tier 1 suppliers and their smaller counterparts, according to Dan Hearsch, managing director of the New York-based company’s automotive and industrial practice.

“Throughout the supply chain, everyone runs out of money,” he said. “That could be 10% of global demand this year, its impact, which will crater the recovery. We don’t think we are exaggerating.”

General Motors expects the chip shortage to cut its earnings by $ 1.5 billion to $ 2 billion this year. Ford Motor said the situation could reduce its earnings by $ 1 billion to $ 2.5 billion in 2021. Honda Motor and Nissan Motor combined hope to sell 250,000 fewer cars by March, due to the shortage.

Semiconductor chips are extremely important components of new vehicles for areas such as infotainment systems and more basic parts, such as power steering and brakes. Depending on the vehicle and its options, experts say a vehicle can have hundreds of semiconductors. The most expensive vehicles with advanced security and infotainment systems have much more than a basic model, including different types of chips.

“I can’t imagine anyone being spared,” said Hearsch. He said the situation could turn into a “knife fight” between companies, industries and even countries over the supply of chips, which are used in everyday consumer electronics.

One of the only exceptions so far is Toyota Motor, which on Wednesday said it had a chip stock for four months and did not immediately expect global shortages to hit production, according to Reuters.

Tesla’s CFO, Zachary Kirkhorn, told investors during the company’s quarterly earnings call last month that shortages, as well as the port’s ability to ship, “may have a temporary impact” on the automaker. In a public filing, the company said the scarcity impact “is still unknown”, saying that the unavailability of any parts could affect production.

Automakers are struggling to get supplies of the chips, which have extremely long delivery times due to their complexity. Shortages are far below the supply chain, causing a ripple effect across the network.

Some automakers, such as GM and Ford, have confirmed plans to partially manufacture products and store them until vehicle supplies are available. Others said they could seek to buy parts directly from smaller suppliers, cutting much of the current supply chain.

Research firm IHS Markit predicts that 672,000 fewer vehicles will be produced in the first quarter of 2021 due to a shortage of semiconductors, including 250,000 units in the world’s largest vehicle market, China.

While major semiconductor suppliers, such as Taiwan Semiconductor Manufacturing and United Microelectronics, have announced investment plans to increase production capacity, IHS says these plans will do little or nothing to alleviate short-term shortages.

“As the cause of these restrictions is the result of the growing demand from OEMs and the limited supply of semiconductors, this will not be resolved until both forces are aligned,” said Phil Amsrud, senior analyst at IHS Markit for advanced driver assistance systems. , semiconductors and components.

One of the most affected automakers is Ford. The company was forced to significantly cut production on its F-150 pickup this week, which is extremely important to the company’s profits. Ford said it is working closely with its suppliers to buy the chips, which are largely exclusive to the pickup and cannot be replaced by those from cheaper vehicles.

This is different from rival GM. The Detroit automaker temporarily suspended production at three auto and crossover factories in North America until at least mid-March. The effort aims to prioritize the production of its most profitable pickups and SUVs, according to CFO Paul Jacobson.

The global automotive industry is an extremely complex system of retailers, automakers and suppliers. The latter group includes larger suppliers, such as Robert Bosch or Continental AG, which supply chips for their products from smaller, more focused chip makers, such as NXP Semiconductors or Renesas.

A twist in the supply chain during any part of the process can have a tremendous ripple effect on production.

“This is a classic example of the bullwhip effect,” said Razat Gaurav, CEO of software and supply chain analysis company Llamasoft. “Small changes in demand, as they propagate up the value chain, variability and volatility increase dramatically.”

Much of the problem starts at the bottom of the supply chain, involving “wafers”. Wafers are used with the small semiconductor to create a chip that is then placed in modules for things like steering systems, brakes and infotainment.

A 26-week lead time is required to build the chips before they are installed in a vehicle, according to Hau Thai-Tang, head of product platform and chief operating officer at Ford.

The source of the scarcity dates back to the beginning of last year, when Covid caused continuous shutdowns for vehicle assembly plants. With the closure of the facilities, suppliers of tablets and chips diverted the parts to other sectors, such as consumer electronics, which should not be so harmed by orders placed at home.

“These chip makers, as well as the wafer makers, started to redistribute their ability to like consumer electronics, which was growing because of people working at home and virtual work patterns,” said Thai-Tang during an interview. investor conference last year. “Fast forward, if you add 26 weeks to when they made those decisions, the slump or depression in supply started to hit the automotive sector in the second half of last year, going into the first quarter.”

But demand for new vehicles was more resilient than expected during the outages, mainly by consumers, so the industry recovered much faster than expected. When that happened, chip suppliers continued to divert resources from the automotive sector and are trying to keep up with demand from the automotive industry.

“There is no easy way out of this,” said Kristin Dziczek, vice president for industry, work and economics at the Center for Automotive Research. “Last year, we knew that once they were able to level the curve and put safety protocols in place, they could return to production. Not the case now. We have really long delivery times and more and more demand for chips . “

– CNBC’s Lora Kolodny contributed to this article.