The perfect storm
The shortage of essential automotive chip components – specifically integrated circuits (ICs) such as microcontrollers (MCUs) and application-specific integrated circuits (ASICs) – hit the industry like a Category 5 hurricane.
In the first half of 2020, there was a dramatic shift in semiconductor fabrication away from auto ICs, as carmakers slammed on the brakes and shut plants for two months during the pandemic. Automotive ICs, which had peaked at 10.4% of semiconductor fabrication market share in the last week of December 2019, fell to just 3.6% by the week of May 8, 2020, according to market researcher VLSI Research. “Auto IC sales [in] total dropped 44% over this period,” says VLSI Research CEO Dan Hutcheson. Meanwhile, total semiconductor sales rose 4% in the first half of 2020, as demand for home computing and networking equipment surged and chipmakers pivoted away from auto ICs (1).
Adding to the problem was the warp-speed transition from doom and gloom to fast and furious. Given the grim market outlook for car sales at the beginning of the pandemic, the supply chain did not plan for additional capacity. Suddenly, vehicle demand grew as consumers stopped using public transportation and ride-sharing services. This pandemic-related demand forced both new and used car sales to come roaring back, requiring the automotive supply chain to start back up.
Impact on the industry and suppliers
The impact on the industry will be heavy: The semiconductor shortage will cut $60.6 billion in revenue from the global automotive industry in 2021, an estimate that includes the entire supply chain — from dealers and automakers to large tier-1 suppliers and their smaller counterparts. “All the way up and down the supply chain, everybody is out some portion of money,” said Dan Hearsch, a managing director at AlixPartners (2). In Detroit, GM could lose up to $2 billion, while Ford Motor may see a $2.5 billion drop (3). Manufacturing output in the first quarter of 2021 will be reduced by more than 670,000 vehicles, according to IHS Markit, and for the full year, lost production is likely to be almost 1.3 million vehicles:
- GM could lose an estimated 111,450 vehicle sales, according to AutoForecast Solutions (4)
- Ford is reducing shifts at two plants that produce its best-selling model, the F-150 pickup (5)
- GM and Ford have confirmed plans to mothball partially built products until supplies become available
- Honda Motor and Nissan Motor, Japan's second and third largest automakers, will sell a combined 250,000 fewer cars (6)
Moreover, as companies battle over the limited supply of chips, the situation is certain to worsen.
How we got here
The microchip supply shortage stems from the COVID-19 pandemic, which has taught businesses that they need to be more nimble, which isn’t easy to do, especially in the automotive ecosystem. But COVID-19 is only part of the problem. As we’ve seen with so many other problems arising out of the pandemic, COVID-19 has simply brought to light a problem that’s been lurking in full view for a long time – and is not about to disappear. Indeed, American automakers face a deeper, more structural issue that goes beyond the current bottleneck.