It’s not really a secret that the automotive industry was a mighty crippling hit once the pandemic in March of last year. The disruption of supply chains, causing critical component shortages that forced manufacturers to their knees.
Some have tried to find a positive spin on this, stating that the used vehicle market has been booming since last year, continuing into 2022. Unfortunately, that only means higher demand, which will result in higher prices to meet such demands.
So, what does the future hold for the automotive industry? Could this chip shortage be staying, or do we see the light at the end of the tunnel?
First, A Quick Recap
Globally, the auto industry has experienced several traumatic ripples due to the COVID-19 pandemic. However, you might not be aware that the semiconductor supply chain was already in a heap of trouble long before 2020.
The US-China and Japan-Korea trade wars disrupted the market in 2018, causing devastating turbulence for the chipmakers. Both wars not only raised prices but also a shortage of raw materials. The US/China trade war’s ripple effect began in three different factors:
- The tariffs that affected these raw materials, leading to a wafer shortage in 2019.
- An increased end-product demand.
- Uneven foundry equipment.
A new round of trade tensions erupted in 2019 when China announced that it would impose tariffs of $75 billion on US goods. It also didn’t help that tension between China and the United States rose when the US blocklisted China’s biggest chipmaker, SMIC, causing further supply hoarding. The last phase of US tariffs was estimated to hit $120 billion worth of Chinese goods in September 2019.
An agreement between both parties was eventually reached in 2019 that included structural reform and changes to China’s economic and trade regime. There was hope that this agreement would reduce the back-and-forth tariff increases on imports.
The trade war between Japan and Korea broke in 2019 after Japan implemented export restrictions on raw materials used to manufacture automotive chips. SK Hynix and Samsung, both major semiconductor manufacturers, headquartered in South Korea, found themselves in the crossfire. As were major chipmakers, who were heavily dependant on chemicals vital to creating chips produced in Japan.
Cut to 2020, and, well, you know what happens next. COVID-19 hit on a global scale, forcing every industry to meet supply and demand for the sudden economic thump. Chipmakers had no choice but to shut down their production for about six months to comply with government shutdowns. When they finally returned to work, semiconductor manufacturers had to adjust to the sudden increased pressure.
It also didn’t help that there was a rise in demand as purchasing behaviour shifted in consumers. Staying home, waiting for a stimulus cheque doesn’t give you a lot of wiggle room to purchase a brand-new car, even if it was used. Due to all these factors, major automakers like Ford and Toyota had to cut production.
As the pandemic continued throughout the year, global chipmakers were scrambling to adjust as the supply chain kept on taking a beating, trying to remedy constant shortages.
Did Things Look Up In 2021?
Well, you probably already know the answer to this question… but here we go.
Companies certainly tried to keep their heads up after a genuinely devastating previous year… but that didn’t last very long. Despite an increasing reliance on artificial intelligence and the Internet of Things, an exciting growth in the automotive industry, the pandemic continued with demand growth and raw material shortages.
During the first quarter alone (January – March), chipmakers struggled to complete their orders, forcing companies to either decrease their production lines or shut them down completely.
In just February, Texas was plagued with rolling blackouts across the state from a winter storm, causing a significant disruption with the auto chips’ supply chain. Manufacturers including Samsung and NXP were forced to suspend their operations, causing a backlog in the supply chain.
Moving into the second quarter, a drought in Taiwan delayed market recovery causing further shortages to the industry. Other countries, including Vietnam, Thailand, and Malaysia, continue to fight against large-scale COVID-19 cases and severe weather conditions.
Finally, in Q3, power outages and deteriorating raw materials were too familiar with the supply chain. China began enforcing power cuts that mandated factories to limit and halt production entirely. Mix that in with labour disruption in response to the rising COVID cases, and not a lot will get accomplished.
What About The Future?
While it would be nice to end this out on a “more-uplifting” note, unfortunately, that will not be the case.
Recently, Morgan Stanley that the shortage could be coming to an end due to production coming back in full force in Malaysia. Shame no one else is sharing that same optimism. Gartner stated that this persistent shortage will go until the second quarter of 2022.
“The semiconductor shortage will severely disrupt the supply chain and will constrain the production of many electronic equipment types in 2021. Foundries are increasing wafer prices, and in turn, chip companies are increasing device prices,” said Kanishka Chauhan, principal research analyst at Gartner.
At the same time, a Forrester research director, Glenn O’Donnell, states that the chip shortage will extend into 2022 and 2023.
“Technical advances just don’t go backwards. While the human race will need more chips, the manufacturing capacity cannot respond to keep up,” he stated in a blog post.
So, in reality, no one can really predict how long this shortage will last. It really depends on who you’re asking or is attempting a forecast. There are definitely companies and manufacturers out there trying to pick up the pieces of the last two years.
Intel announced back in March that they are spending $20 billion to build two new chip plants in Arizona, while TSMC is planning to put forward $28 billion on higher capacity with fresh chips and building plants.
Even Texas Instruments recently announced that they plan to erect at least four new semiconductor plants in Texas, with construction slated to begin next year. So, there could be good news on the horizon after a devastating couple years of scrambling.
Here’s hoping 2022 brings better news for the automotive industry.
