Shortage of microchips still limits car production


Automakers cut 76,000 vehicles from global production plans last week, according to analysts at AutoForecast Solutions. They will produce about 3.23 million less this year than expected, according to the company.

Analysts have long predicted that the global microchip shortage plaguing the automotive industry will ease towards the end of 2022. Further production cuts appear to dash that hope.

How did we get here and how long will it last?

The size of the problem

In 2019, before the first hint of COVID-19, Americans bought more than 17 million cars. It was the fifth year in a row that we did it.

By the end of 2022, Kelley Blue Book’s parent company, Cox Automotive, projects Americans may have purchased as few as 13.3 million.

The drop comes despite intense demand for new cars, with prices hitting record highs this summer. The average new vehicle in August sold for $48,301, up 10.8% from a year ago.

The problem? A global shortage of microchips.

How we got here

A generation ago, only the most expensive cars contained microchips. Today, even a very affordable low-tech car like the Mitsubishi Mirage – with a starting price of just $14,645 – contains dozens of tiny microprocessors. They control everything from traction control to cabin temperature.

A high-end luxury car, like the Mercedes-Benz EQS, with its programmable scents and hands-free highway driving system, can hold hundreds of them.

A perfect storm of events has left the automotive industry with a limited supply of these crucial chips.

At the start of the COVID-19 pandemic, as governments around the world imposed travel restrictions to limit the spread of the virus, demand for new cars plummeted. Automakers have limited their microchip orders, anticipating months of slower vehicle production.

But chip factories haven’t slowed down like car factories. Consumers ordered new electronic devices to make it easier to work and attend school from home.

When vaccines allowed people to travel again, pent-up demand for new cars exploded. Automakers have tried to speed up their orders for new chips. But the chip factories were already operating at full capacity. They still haven’t caught up.

To complicate matters, Americans’ thirst for new electronic features in their cars is only growing. In August, 17.5% of new cars sold were luxury vehicles, a near record.

Chip production recovery

Global microchip production is beginning to recover.

Susquehanna Financial Group reports that in August, chipmakers were filling orders on average a day faster than in July.

Other industries that use chips are picking up speed. Susquehanna analyst Chris Rolland reports that demand for new cellphones has slowed, easing pressure on chip supply.

Dell Technologies chief financial officer Tom Sweet told Bloomberg this week that the personal computer supply chain is “running more like the historical norm” this month.

Investors seem to believe the chip market is softening. At the time of writing, the Philadelphia stock market’s semiconductor index is down more than 36% year-to-date.

But it’s the wrong kind of chips

If chip production is picking up, why are automakers cutting production even further?

Because the high-end chips used in computers and cell phones aren’t the chips automakers need.

The automotive industry’s modular design approach – the power window switches in one automaker’s most expensive vehicle are often the same as those found in its least expensive – means that cars from are littered with older, low-powered microchips performing simple functions.

Automakers go through a rigorous qualification process to certify the chips for use. They cannot easily replace a more complex chip with an older chip that has already passed security testing.

“We’re going to get a lot more semiconductor capacity in the second half of 2022 – we’re nearing the end of the supply shortage,” said Sandeep Deshpande, head of European technology research for JP Morgan. “However, the capability still needs to be qualified for use in the automotive industry. … If it weren’t for this problem, I would be of the opinion that things could be back to normal by the end of the year.

Winding chip production is a slow process

Chipmakers will only switch foundries from producing high-end computer chips to building cheaper devices used in cars when it’s the most profitable decision. So change comes slowly.

Once it arrives, it takes time to execute the commands. Mohit Sharma, an India-based procurement and supply chain expert who advises Fortune 500 companies, told Financial Management Magazine,A typical semiconductor production line may involve 700 manufacturing steps over 14 weeks.

Chipmakers are working to increase production capacity. But starting new factories is a long process.

Intel announced plans for two new microprocessor factories in Ohio last January. They will produce their first usable chips, NPR reports, sometime in 2026.

Domestic production may be part of the answer. According to a September 2020 report by the Semiconductor Industry Association, the United States produced 37% of the world’s chip supply in 1990. Today, only 12% of the world’s supply is manufactured domestically.

More chips doesn’t necessarily mean more cars

For decades, the practice of the auto industry has been to keep a stock of new cars available for sale. Dealerships routinely kept so much inventory that they discounted most cars to sell.

Even once flea production is restored, this practice may not return.

“We will never return to the level of inventory we held before the pandemic, because we have learned that we can be much more efficient,” GM CEO Mary Barra told reporters last year.

Last fall, BMW chief financial officer Nicolas Peter told the Financial Times that the automaker planned to “clearly stick to how we manage supply to maintain our pricing power at the current level”. .

Mercedes-Benz parent company Daimler AG has the same idea. “We will consciously undersupply the level of demand,” Daimler chief financial officer Harald Wilhelm told FT.

Ford CEO Jim Farley has suggested the company could move closer to a build-to-order business model, although he recently promised dealers that Ford would not sell cars directly to customers, the way You’re here.

Dealer groups also say large inventory and deep discounts may not return.

Automakers are financially interested in making as many cars as Americans will buy. But perhaps the chip shortage teaches them not to earn more than that.

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