Before the Internet of Things (IoT) computer chips were only used in computers. Today, they power all kinds of devices. They are critical parts of cars, cell phones, IoT devices, and consumer electronics. Computer chips increased our efficiency. Our chip reliance when combined with the COVID-19 pandemic has led to a global computer chip shortage. As demand continues to outstrip supply, it’s only a matter of time before you feel the effects of the global chip shortage.
The global chip shortage
The global chip shortage is a direct result of the COVID-19 pandemic. The crisis has impacted automakers around the world. Modern vehicles use between 500 and 1,500 computer chips. The automotive industry needs tens of millions of computer chips annually. The pandemic led automotive suppliers to cut demand for chips because of the economic downturn that followed. As demand increased for cars, semiconductor manufacturers lacked the capacity to handle the increased demand for automotive chips as these manufacturers had shifted their lines to other industries that wanted to buy their chips.
Plants are idled
The largest impact of the global chip shortage can be seen in the automotive industry. General Motors (GM) plans to temporarily idle nearly all its assembly plants in North America. GM will keep a handful of assembly plants online in Texas, Kentucky; and Michigan. GM spokesman Dan Flores told the Detroit Free Press, “All the announcements we made today are related to the chips shortage …”
GM is not the only manufacturer impacted. The Ford Motor Company (F) announced that its profit for the second quarter fell to $561 million, about 50% less than what the company achieved last year, due to the crippling chip shortage. Ford paused production of its F-150 pickup trucks and other SUVs at its Kansas City assembly plant and cut shifts at truck plants in Michigan and Kentucky. The company also had to slow production of its Mustang Mach-E, its electric model of the classic muscle car.
Other carmakers were also impacted. In the summer, several automakers warned about delays in production due to the chip shortage including:
- Tesla (TSLA) would delay the Cybertruck until 2022 and was turning to alternative chips for its electric vehicles.
- Toyota (TM) suspended production. Lexus and Land Crusier production was suspended for four days in August. Toyota is also limiting the production of its full-size Tundra pickup truck.
- Elsewhere in Japan, Nissan lowered its production. Nissan and Honda expect to sell 250,000 fewer cars due to the shortage.
The European manufacturers are not exempt from the shortage.
- Stellantis suspended production in plants in Mexico and the U.S.
- Volkswagen was hit hard and had reportedly sharply cut production since December.
The root cause
The root cause of the automotive chip shortage is the COVID-19 pandemic. Not only did consumers and workers have to stay at home, but this caused numerous companies to cut back or stop production temporarily. When this happened, consumer electronics, computer, and automotive vendors all cut demand due to the uncertainty of the situation.
The post-lockdown recovery happened in the consumer and computer markets first. The car OEMs were slower to react. They wanted to make sure demand was back before orders were sent, according to Phil Amsrud, senior principal analyst for automotive at IHS Markit.
When the automotive suppliers surprisingly saw demand return they put orders back into the supply chain. It was too late. Semiconductor manufacturers were already fully booked producing chips for other sectors. There was no capacity left for auto chips, which caused the shortage. Maite Bezerra, automotive research analyst at ABI Research commented, “… carmakers … rely on just-in-time production, they did not have a large stock of chipsets, so the shortage is already affecting production, … vehicles with sophisticated ADAS and infotainment systems that require a higher amount of chips.” Automotive microprocessor lead times grew to 30+ weeks.
Mr. Amsrud said that without any surprises the chip shortage may have resolved itself. However, the winter storm that hit the southern parts of the U.S. put pressure on all supply lines including the automotive side.
Causes of the Current Chip Shortage
1. Industry Missteps – The semiconductor industry failed to predict a sharp rise in chip demand. Intel (INTC), experienced problems developing its products. There were delays in shipping its 10nm chips in 2018 and 7nm chips in 2020. This situation forced more customers to buy AMD chips, which placed a strain on the entire supply chain.
2. New Technologies – In the past, the chip industry could count on a steady demand for years. However, emerging technologies like IoT, cloud computing, 5G, self-driving cars, and AI have made demand unpredictable. Additionally, most of these technologies require compatibility with smartphones. The mobile phone industry must continually upgrade its chips to meet these fast-evolving requirements.
3. US-China Tech War – Trade squabbles between the U.S. and China during Trump’s administration grew. They used national security concerns to apply sanctions on Huawei and SMIC. The sanctions sent their supply chain into a panic. These companies stockpiled on chips before the sanctions came into effect, which exacerbated the global shortage.
4. Crypto Mining – Bitcoin’s recent bullish run made crypto mining a lucrative venture. Bitcoin mining requires massive computing resources, which also include chips. The more valuable bitcoin becomes the more computer chips bitcoin miners use.
When will it recover?
IHS Markit’s Amsrud, predicts that the third quarter will likely experience improvements, but will not be able to keep up with demand, while Q4 will meet demand but will not be able to catch up with lagging supplies. Only in the first quarter of 2022 will the industry make a dent in what is lagging.
However, not everyone agrees. Chipmaker ON Semiconductor CEO Hassan El-Khoury told CNBC the company sees the bottleneck in the automotive chip industry being relieved in the third quarter of 2021 as companies rush to expand capacity in semiconductor manufacturing plants.
Intel CEO Pat Gelsinger told the BBC it will be a year or two before the chip manufacturers can meet the demand for computer chips.
How the Chip Shortage May Affect You
Inadequate chip supplies mean you’ll have to wait longer for your desired electronic product or settle on a slower model. The shortage has also raised the prices of available chips significantly. These costs ultimately pass on to the consumer.
You can no longer assume that the product you want will always be in stock. As the chip shortage continues to wrack the globe — and it’s finally coming for the iPhone. Apple CEO Tim Cook said that silicon “supply constraints” will start affecting iPhone sales in the coming months. The worldwide shortage of semiconductors had already been delaying production of the company’s MacBooks and iPad, Cook said.
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Ralph Bach has been in IT long enough to know better and has blogged from his Bach Seat about IT, careers, and anything else that catches his attention since 2005. You can follow him on LinkedIn, Facebook, and Twitter. Email the Bach Seat here.
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