Explained: Automakers hit hard by chip shortage; here’s what led to global crisis

Countries like South Korea, Taiwan, China, EU, and the US are contemplating producing their own chips in the coming years. However, the manufacturing plants cannot be established instantly. It may take years for new supply as plants have to be built and fitted with proper technology, said Timothy Uy, Associate Director, Moody’s Analytics.

Microchips are made of silicon and are used in computers, smartphones, appliances, vehicles, and other electrical devices.

A modern car can easily have more than 3,000 chips as vehicles require them for nearly everything — engine control units, transmission control, brakes, steering, infotainment systems, sensors, backup cameras, and others. The use of chips in cars has increased sharply due to the high demand for high-tech features in vehicles.

Anticipating low sales due to the COVID-19 pandemic, several auto companies reduced production in the first half of 2020. As a consequence, chipmakers diverted their supply to other industries.

Following the peak of the pandemic, the demand for cars bounced back but the supply of chips could not match the pace. Securing these chips has been especially challenging for automakers as semiconductor manufacturers give priority to manufacturers of smartphones and other consumer electronics as they are usually more lucrative consumers.

Cars usually require 'legacy chips' which are more durable and long-lasting but less profitable for chipmakers. On the other hand, other tech industries go for regular chips that are more profit-making for chip manufacturers.

Besides, weather conditions have also slowed down the production of microchips. Storms in Texas and a severe drought in Taiwan forced temporary shutdowns of several semiconductor factories. As chip manufacturing requires large amounts of pure water, famine conditions hit the supply hard.

Not long ago, a fire at a plant owned by chipmaker Renesas Electronics in Japan also disrupted its supply.

The demand for gaming consoles, televisions, smartphones, and other consumer electronics is exploding and the chipmakers are catering to this industry on priority.

Meanwhile, automakers — including General Motors, Ford Motor, Toyota, Honda, and Volkswagen— are forced to stop the production of certain models due to a shortage of microchips. Several carmakers had to furlough workers as well.

In fact, carmakers are now competing for microchips and the race may get worse in the coming months, say experts.

According to a report by consulting firm AlixPartners, the ongoing semiconductor chip shortage is expected to cost the global automotive industry $110 billion in revenue in 2021.

Carmakers in India are also struggling with the shortage of chips. Tata Motors recently cut the sales forecast of its luxury car brand, JLR, whereas Maruti Suzuki hiked car prices due to the increased cost of production. Similarly, Mahindra & Mahindra said the launch of its flagship Mahindra XUV500 and its new Scorpio would be delayed due to constraints in chip supply.

At Bajaj Auto, the manufacturing of premium motorcycles has been hit.

Despite being a large market for all tech products, India lags behind in semiconductor production due to a weak ecosystem and shortage of resources. However, the Ministry of Electronics and Information Technology is actively seeking foreign capital to set up semiconductor manufacturing facilities in the country.

By April 30 this year, more than 20 chipmakers submitted Expressions of Interest (EOIs) to set up manufacturing plants in India.

The semiconductor consumption in India was worth US$21 billion in 2019 and was growing at the rate of 15.1 percent, according to the India Electronics and Semiconductor Association.

In July, US President Joe Biden announced a $2 trillion plan which included an estimated $50 billion investment for chip manufacturing.

Taking cognisance of the crisis, the European Union is also discussing solutions with Taiwanese officials.

In June, automotive supplier Bosch opened a $1.2 billion chip factory in Dresden, Germany. The unit will supply microchips to automotive customers.

The chipmakers are also ramping up production to tide over the crisis. However, estimates suggest that chip shortage will continue to haunt automakers for at least one more year more.