Microchip shortage saga and impact on the auto industry

Microchip shortage saga and impact on the auto industry

After unprecedented zero sales, plant shutdown; the global auto industry is now facing a microchip shortage, also spawned out by the Covid pandemic.

Initially, it was lockdown, then parts supply disruption due to the Covid-19 pandemic, and now the auto industry is trying to revive with the unprecedented crisis, but facing a new problem again. This time, it’s in form of tiny microchips or also known as semiconductors. The global shortage of critical parts like microchips has led to major trouble looming over the more than $450 billion worth of the global auto industry.

It even led to a plant shutdown as well. Ford India had to extend the shutdown of its Maraimalai Nagar factory near Chennai for a week after Pongal, up to 24th January, just because of the microchip shortage. According to industry experts, the microchip shortage and its resultant impact will hit the production of Ford vehicles for both the domestic and export markets by around 50%, which will be an added pain after the Covid shock.

This was just one instance, where one automaker is facing the crunch of microchips. There are several other automakers too facing the same problem, due to the global shortage of semiconductor chips, which has started disrupting automobile factories worldwide.

PIC

Ford has already shut down one of its US plants because of this microchip shortage. Toyota’s Chinese plant, Audi and Volkswagen’s factories in Germany, and Honda’s UK plant also have seen production shutdowns because of the microchip supply disruption. Fiat Chrysler is idling production at a Brampton, Ontario, plant; while Subaru announced to trim several thousand vehicles from its production schedule at plants in the U.S. and Japan due to the microchip shortages. Among others, General Motors, Renault too are feeling the impact. Several auto companies have already furloughed thousands of employees due to the crisis.

Clearly, it’s a great menace; the global auto industry is facing now in the New Year.

Microchip shortage

Taiwan attempts to be the saviour

Meanwhile, Taiwan’s Ministry of Economic Affairs said that since the end of 2020, it has received requests through diplomatic channels to help ease the shortage of microchips for the auto sector. The country has claimed that it already asked local tech companies to provide full assistance. Taiwan is the home of the largest chipmaker of the world, Taiwan Semiconductor Manufacturing Co Ltd (TSMC).

It has been already reported that German Economy Minister Peter Altmaier had written to Taiwan’s government about the problem and asked for their assistance.

According to the Taiwan government, major international automakers are not direct customers of Taiwanese microchip manufacturers, but other automotive semiconductor makers place orders with Taiwan manufacturers and sell them to the carmakers. After receiving requests from governments across the world, the Taiwan government has claimed that it is in talks with domestic microchip suppliers to provide assistance to the crisis-hit countries.

TSMC too has said that the crisis due to microchip shortage is the most important issue and the company is dealing with it accordingly to address the concern. “TSMC is working closely with our automotive customers to resolve the capacity support issues,” said the company in a statement.

Microchip shortage

Microchip and its importance

The microchip shortage has been severely affecting two giant industries of the world, namely, automobile and technology. The question arises, that why the shortage of these tiny-looking elements has had such a huge impact on the industries that literally brought them to existence. Before we contemplate how their shortage is affecting industries such as automobiles and technology; we need to understand what exactly a microchip or semiconductor is.

A microchip is a tiny wafer of semiconducting material used to make an integrated circuit. A semiconductor is also something similar to a microchip. A semiconductor material has an electrical conductivity value falling between that of a conductor, such as metallic copper, and an insulator, such as glass. So basically, semiconductors and microchips function as a unit through which electricity passes from one platform to another.

These microchips are used in places like infotainment systems and other electrical components of a vehicle. They can be called the controller of various functions of a vehicle. These tiny chips make up an important part of the automobiles and technology industry as well.

Microchips or semiconductors are often referred to as the brain of modern technology. Due to their role in the fabrication of electronic devices, semiconductors are an important part of our lives. According to Semiconductor Industry Association, the semiconductors sometimes referred to as integrated circuits (ICs) or microchips are made from pure elements, typically silicon or germanium, or compounds such as gallium arsenide. In a process called doping, small amounts of impurities are added to these pure elements, causing large changes in the conductivity of the material.

Developments in semiconductor technology during the past 50 years have made electronic devices smaller, faster, and more reliable. Think for a minute of all the encounters you have with electronic devices in the past few hours. How many have you seen or used in the last 24 hours? Each has important components that have been manufactured with electronic materials.

A single semiconductor chip has as many transistors as all of the stones in the Great Pyramid in Giza, and today there are more than 100 billion integrated circuits in daily use around the world—that’s equal to the number of stars in our corner of the Milky Way galaxy.

Microchips are truly a modern marvel, a feat of human ingenuity and engineering unmatched by any other industry. That pretty much sums up why the impact of semiconductor or microchip shortage is so humongous.

Now, let’s get on to the next part.

Microchip shortage

Why there is a microchip shortage?

First and foremost, the Covid-19 pandemic that swept across the world like a raging bull had massive bearings on various sectors of human activity from every category of livelihood and production processes. And various factors, directly or indirectly related to the pandemic, have affected the production of microchips or semiconductors and by extension, the automobile and technology industry as well.

The automakers across the world were ready for any sort of hit during the pandemic but they never expected the unprecedented threat due to the surge in demand for PlayStations. When various governments across the world announced total lockdowns all over, there was a meteoric rise in the demand for 5G phones, PlayStations, PCs, and laptops because the locked-in world population wanted to occupy them digitally, be it their classes, gaming interests, or any other knack, so on and so forth.

Also, many businesses from across the world upgraded their interfaces massively so as to facilitate work from home, and hence the demand for microchips went uphill in that sector as well. Hence, a lot of factors accumulated together impacted the supply of microchips to the automobile and tech industries. Rather say, the lockdown actually imbalanced the demand and supply ratio between the microchip-automobile industries.

The situation was okay so far until the automobile production commenced again and demand for vehicles went up. Once the lockdown restriction was being eased across the world in the latter half of 2020, the automobile sales shot up some notches to the delight of the manufacturers, especially due to the pent up demand and rise in preference for personal mobility. Here, the microchip shortage came to light, as all the industries were suddenly seeking the small chips for their respective product manufacturers.

As MD of AlixPartners, Dan Hearsch described the situation, “Everybody and their brother wanted to buy an Xbox and PlayStation and laptops, while automotive shutdown. Then automotive came back faster than expected.”

Microchip shortage case study: Japan auto industry

ToyotaToyota is cutting production of Tundra pickup trucks in the San Antonio plant by 40% in January 2021. In China, Toyota halted lines at its Guangzhou factory.
HondaHonda announced a two-day halt in output at its Swindon plant in the U.K. on January 5 and 6, which produces Civic hatchbacks and employs about 2,900 workers. Again it stopped production between January 18-22. In North America, Honda is reducing the production of Accord, Civic, Insight, Odyssey, and Acura RDX. It will adjust production at its Marysville and East Liberty plants in Ohio, alongside Alabama, Indiana and Canada, and China.
NissanNissan announced a production cut at one of its Oppama plant in Japan.
SuzukiSuzuki is checking which models’ production will be impacted.
SubaruSubaru is considering production adjustment. Models and plant details are yet to be disclosed.
MitsubishiMitsubishi is checking any impact on outputs.
MazdaMazda is checking any impact on production.

If we analyse the global impact of microchip shortage on the automotive industry, the situation in Japan can be brought in as a case study.

According to a report, multiple car manufacturers all across Japan have cut down their production owing to the shortage of microchips. As mentioned earlier, lockdown and travel curfews put a helter-skelter demand for gaming consoles which forced the chip manufacturers to make the bulk of chips that go into these industries rather than the ones that automobiles need. This implies that companies like Toyota and Ford might face a shortage of materials required to bring the industry back to full-fledged production.

Chen Shinhua, deputy general secretary of China Association of Automobile Manufacturers (CAAM), said that the shortage of microchips may have had a relatively larger impact on China’s automobile production in late December 2020 and may have continued into the second business quarter as well. He also mentioned that many chipmakers had hiked their prices. So the impact of microchip shortage on the auto industry cannot be measured in terms of vehicle sales reduction only.

Also Read: Auto finance in India: Where are we now and what’s the way forward?

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