All over the world, car assembly lines are getting quiet, workers stand still, and dealer parking lots look empty.
A shortage of semiconductors, the tiny but critical chips used to calibrate cars’ fuel injection, run infotainment systems, or provide the brain for cruise control, has turned automobile manufacturing on its head.
A General Motors plant in Kansas City closed in February for lack of chips and has not yet reopened. Mercedes-Benz has started hoarding its chips for expensive models and is temporarily closing factories that make cheaper C-Class sedans. Porsche warned dealers in the US this month that customers may have to wait another 12 weeks to receive their cars because they lack a chip to monitor tire pressure.
French automaker Peugeot, part of the newly formed Stellantis automobile empire, has even replaced digital units with old-fashioned analog speedometers in some models.
The disruption couldn’t come at a worse time. Demand for cars has recovered sharply after the onset of the pandemic. Consumers are willing to spend money saved over the past year and eager to avoid planes by driving on the road. The supply of semiconductors robs automakers of the opportunity to make up for lost sales.
“We already have a robust demand situation, which is slowed down more than anything by the semiconductor problem,” said Ola Källenius, CEO of Daimler, in an interview.
Some automakers like Renault have started testing their chips, reserving them for more expensive models that are more profitable. “We are trying to find a smart way to prioritize cars with higher margins,” said Clotilde Delbos, deputy managing director of Renault, to analysts on Thursday.
Some buyers may be lucky enough to take home a new car, but options that use special chips may be lacking. Porsche has told US dealers that for several months it will not be able to supply high-end seats in the Macan SUV that can be adjusted in 18 different ways – a popular upgrade. The required chips are not available.
A big reason automakers can’t find enough chips is because semiconductor manufacturers have given priority to manufacturers of smartphones, video game consoles, and other consumer electronics, who tend to be more lucrative customers.
A modern car can easily have more than 3,000 chips. But cars make up a tiny fraction of chip demand. Taiwan Semiconductor Manufacturing Company (TSMC) is one of the few manufacturers of a wide variety of chips that are critical to automotive manufacturing. However, according to Roland Berger, a German consulting firm, the automobile manufacturers generated only 3 percent of the company’s sales in 2020.
TSMC’s main customers are smartphone manufacturers, who account for half of its sales. Smartphones are far more numerous than cars. In 2019, before the pandemic devastated the global economy, The car factories produced 93 million vehicles, compared to a smartphone production of 1.4 billion units.
Overall, chip shortages and other problems in the supply chain cut production by 1.3 million vehicles in the first three months of the year, according to IHS Markit, a consulting firm.
The problem has become a problem for political leaders in Washington and other capitals.
German Economics Minister Peter Altmaier recently appealed to his counterpart in Taiwan, a global center for semiconductor manufacturers, and asked in so many words whether the Taiwanese minister could not help but get rid of a few chips that German automakers urgently need.
The chip shortage “has become a serious problem for manufacturers, especially for the auto industry,” warned a group of German economic research institutes in a joint report this month.
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April 23, 2021 at 1:31 p.m. ET
The crisis has shown not only how dependent the automotive industry is on a small number of suppliers, but also how susceptible it is to disruptions. Supply chain managers shuddered last month when an early morning fire brought production to a standstill at a Renesas Electronics factory in Hitachinaka, Japan, north of Tokyo. Renesas is a major supplier of chips that are used to monitor braking, control power steering, deploy airbags, and many other tasks.
The weather also played a role. Storms in Texas earlier this year forced three semiconductor factories to temporarily close. And Taiwan is in the middle of a severe drought, IHS Markit analysts warned in a recent report. The production of chips requires large amounts of very pure water.
Even without a pandemic and supply chain interruptions, the auto industry is in turmoil. In the United States, sales have been essentially flat since the early 2000s. The profit margins are low. Some major automakers may not survive the switch to electric cars.
“If I were a chip maker, I wouldn’t be investing in a new facility if I didn’t get free money from the government,” said ManMohan S. Sodhi, who teaches supply chain management at the City Business School. University of London.
Free money can be on the go. The White House held a chip scarcity summit this month and proposed a $ 50 billion infrastructural budget to reverse a decline in the share of chip manufacturing on American shores. However, new chip factories cannot be built fast enough to address the immediate shortage.
And if government subsidies don’t convince them, semiconductor manufacturers and other suppliers will likely set up new factories in or near China, the largest auto market that’s growing steadily, unlike the US and Europe.
It’s not at all clear how long the chip famine could last. Mr Sodhi said he suspected that chipmakers were exaggerating the lack of government subsidies and that the crisis could be over in a month.
The automotive industry consultants at Roland Berger are more pessimistic and say the shortage could last all year round.
On Thursday, Renault’s Ms. Delbos said “visibility is deteriorating” to determine an end to the chip crisis “as the news changes day by day.”
In the meantime, automakers are improvising to keep the damage as low as possible. Daimler’s Mercedes unit is giving away scarce chips to its most expensive models, such as the EQS luxury electric sedan, which the company unveiled this month and which is expected to start at around $ 100,000.
The triage caused Daimler to temporarily close factories in Germany that manufacture cheaper C-Class sedans. Most of the 18,500 workers in the plants are on leave until the end of April, although they continue to receive state-subsidized “short-time work”.
With this in mind, Volkswagen has stopped production in plants in Germany, where sedans and other combustion models are made, and in Mexico, where the company makes Tiguan SUVs for the American market. A plant in Zwickau that produces ID.3 sedans and ID.4 SUVs, the avant-garde of Volkswagen’s endeavors to dominate the emerging market for electric cars, is not affected, according to the company.
General Motors, which had temporarily halted production at half a dozen plants since the beginning of the year, has in some cases made cars without electrical components and parked them until the parts were available. Ford Motor announced on Wednesday that several U.S. plants would remain idle longer than expected due to the shortage of chips.
The auto industry was previously paralyzed by supply chain disruptions. Mr. Källenius recalled an episode when a hurricane hit Puerto Rico and ceased production at a factory that, to his surprise and pretty much everyone else, was the only source of a coating that was essential for some types of auto electronics.
Automobiles have tens of thousands of parts and so many layers of suppliers and sub-suppliers and sub-suppliers that even automakers have difficulty tracking the origins of all of the components.
The economy of the industry is such that only suppliers with the highest volume survive. Smaller suppliers tend to die out because they cannot produce parts or materials as cheaply as the big companies, leaving the industry dependent on, for example, one or two manufacturers of high pressure fuel lines or a certain specialty plastic.
The current semiconductor shortage may not be the last. The automotive industry’s demand for semiconductors is expected to explode in the coming years due to autonomous driving functions and the increasing popularity of electric vehicles that rely more on software than internal combustion engines.
However, Mr Källenius said the most sophisticated chips weren’t the ones that were giving him a headache right now. “We miss the simplest chips that may only cost cents or dollars,” he said. “That keeps us from building a product that costs $ 75,000.”