Due to COVID-19, the world has faced many challenges. More recently, the pandemic triggered a surge in demand for computers and other electronics as remote work and online learning took over. Other reasons include shifting semiconductor models that have created a bottleneck among outsourced chip factories, as well as effects from the trade war with China.
The initial wave involved people buying PCs, monitors and other gear for working or going to school remotely. Then, last fall, home entertainment gadgets like game consoles, TVs, smartphones, and tablets started flying off the shelves. All these devices need a ton of chips (not just the central processor which can cost tens or hundreds of dollars), including less expensive, smaller chips for controlling the display, managing power, or operating a 5G modem.
The chip shortage now threatens to snarl car production around the world. GM said that it would extend production cuts in the U.S., Canada, and Mexico until the middle of March. They join a long list of major automakers, including Ford, Honda, and Fiat Chrysler, which have warned investors or slowed vehicle production because of the chip shortage. However, the auto industry’s current supply-chain woes may be self-inflicted wounds. When the global economy went into stasis, preparations for future car production halted. Auto-parts suppliers in February and March reduced orders for electronics, betting that large volumes would not be needed well into the future. Chip makers chose not to stockpile parts and wait for car makers’ orders, a decision made easier by surging demand from companies that benefited from the work-from-home era fueling sales of laptops, servers, smartphones, and other electronics.
Products like semiconductors that have longer lead times and large production lot sizes need distribution for efficient buffering between the manufacturers and end customers. Semiconductors have extremely long and complex production cycles that can range from 10 to 26 weeks. Once a production cycle has begun, large quantities of the same product flow in lots through a semiconductor-manufacturing line that pop out at the end in a burst. Higher volume customers, such as smartphone manufacturers, can efficiently receive product directly from a manufacturer. For lower volume, high-mix customers like automotive and industrial companies, distributors buffer inventory to match a customer’s demand for a steady flow of product to the long production cycles of semiconductor manufacturing and provide many value-added services.
From the electronics-manufacturing industry’s point of view, automotive is mostly a low-volume, high-mix customer segment, and it requires buffering through component distributors. Instead, the auto makers’ extreme focus on cost optimization and lean manufacturing meant eliminating these valuable supply-chain partners. The focus on lean should have been balanced with a pragmatic view on the extreme cost of idled automotive production lines. To shut down production lines for $80,000 vehicles because of a missing $2 microcontroller is devastating.
Chips are likely to remain in short supply in coming months as demand remains higher than ever. Car companies will probably need to work more directly with chip suppliers and stockpile inventory in some cases. With chips increasingly crucial to cars, there is little choice. As the economy works to overcome this shortage of chips, car makers will need to have a better understanding of the risks in the supply chains if they are to rebound and get the automotive industry back to what it was prior to the pandemic.