Auto Chip Shortage

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Chip Shortage Compromises the Much Awaited Post Pandemic Auto Industry Turnaround

The global semiconductor chips shortage poses a considerable threat to post-lockdown rebound in demand in the automotive industry. Another factor compounding the shortage is the unexpected surge in consumer demand for new cars. The rise in demand for new cars is expected to support recovery in the automotive industry since the Covid-19 pandemic induced slowdown. However, this momentum has been brought to a screeching halt. Semiconductor chips are vital components that power modern infotainment systems, driver aids and multiple electrical components. The increasing need for better safety and driver assistance systems in cars has provided a niche for semiconductors A modern passenger vehicle typically uses more than 1,400 chips, and this number is expected to increase with the transition to electric vehicles, connected vehicles, and eventually autonomous vehicles. The ongoing semiconductor chip shortage plaguing the automotive industry is expected to cost billions of dollars in revenue in 2021. The shortage also undermined light vehicle production during the first two quarters of 2021. A number of factors have contributed to the shortage of semiconductor chips, including hugely increased demand for consumer electronics, continued growth in cloud computing, and 5G rollout. As automotive production facilities shut down due to the shelter-in-place orders and national lockdowns caused by Covid-19 pandemic, wafer and chip suppliers diverted parts to other sectors such as consumer electronics. The sudden spike in demand for semiconductor chips and continued diversion of supply away from the automotive sector led to the current shortage of automotive chips. The chip shortage was further exacerbated by events such as a major fire at Renesas Electronics` wafer fab in Japan, a massive winter ice storm that shut down fabs in Texas, and a drought in Taiwan, which is the world`s biggest supplier of microprocessors.

The crippling semiconductor shortage has left automakers around the world to completely halt or slow down their production as they strive to secure sufficient chipsets to power the onboard computers. In response, automotive OEMs such as Ford and General Motors cut down their global production in early 2021. GM and Ford also announced plans to partially build products and place in storage until vehicle supplies become available. European automakers also succumbed to the shortage with carmakers such as Daimler, Volkswagen, Renault and BMW slashing their global production. They also anticipate massive earnings cuts. On the other hand, Toyota is the only major automotive OEM to remain unaffected due to a four-month stockpile of automotive chips. The temporary stoppage in production led to thousands of workers being idled or furloughed, while potential car buyers had to face limited options on new vehicle purchases and weeks-long waiting lists. In addition to affecting new vehicle supply, the semiconductor chip shortage also caused used car prices to slope upwards.

Auto chipmakers are scrambling to ramp-up production chip production above normal levels and also resorting to using older chipmaking gear to supply more chips to carmakers. To help ease the shortage of automotive microcontrollers (MCUs), Taiwan Semiconductor, the world`s largest foundry, ramped up its production capacity with further plans to increase auto chip capacity by 60% in 2021. The quick ramp up in production capacity is due to the fact that auto chips typically rely on older nodes which are easier to ramp up. As automotive ICs typically do not require advanced technology, except in some models such as Tesla, they are produced using older gear. The ICs used in braking and engine systems are manufactured using older gear while newer infotainment and assisted driving technologies demand modern chipsets using cutting-edge technology. As a result, the shortage is expected to ease towards the fourth quarter of 2021 or early 2022 with supply relief coming forth from older chip fabs and foundries that produce chips based on small silicon wafers. The world`s leading semiconductor suppliers, including Taiwan Semiconductor and United Microelectronics have announced investment plans to increase production capacities. In addition, over 40 companies have voiced their commitment to increase capacity by more than 750,000 wafers-per-month. The ramped-up production is expected to continue till the end of 2022. The 200-mm facilities are expected to witness a significant increase in capacity by 2024. Furthermore, increase in government investments to boost production of advanced chips is expected to alleviate the supply shortage of semiconductor chips. For instance, the US announced plans to pump in US$52 billion, while the EU and South Korea are expected to invest around US$160 billion and US$$450 billion respectively in the semiconductor sector over the next few years. Companies are also planning to explore new materials such as gallium nitride that allow for faster fabrication of smaller and lighter chips.

Despite these initiatives to push IC capacity around the world, the shortage will continue to linger particularly for automotive OEMS. Semiconductors are complex and chipmaking is one of the most complex, capital, and RD intensive production processes in the world. Semiconductor wafer production is a complex, time consuming and capital-intensive process on account of exacting operational requirements. Semiconductor markets undergo cyclical fortunes with the market witnessing periods of soaring demand leading to higher capacity utilization and eventual capacity build ups. The ramped-up capacities turn over higher supplies that exceed the overall spike in demand over time. In other words, various challenges and difficulties arise in increasing production/supply or addressing the short supply of chips. Despite semiconductor manufacturers investing in new factories and foundry expansions for increasing supply; the projects are unlikely to finish until 2022-end. The exacting requirements of the process-intensive semiconductor fabrication involve multiple design intricacies while capacity expansion needs huge sums and several years to reach full operationalization. Technological sophistication required to accomplish the miniaturization challenge involves hefty investment in research and design. All this is time consuming and hence, capacity expansions in the sector are not instantaneous. Moreover, the fabrication cycle times extend up to 20 weeks or more, to be followed by weeks of assembly, testing and packaging. This further extends the fabrication to finishing interval. Even to meet a slightest uptick in demand, the time interval is higher and thus, demand-supply inequities tend to exist despite best rates of capacity utilization across the industry.



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