What the Chip Shortage Means for the Auto Industry

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A car’s modern dashboard shows the myriad uses of microchips/Image Credit: Pexels

Today’s modern vehicles have hundreds of microchips installed to run the many displays and power features new cars have. However, the global chip shortage is causing auto manufacturers to idle plants or cut production rates. With fewer new vehicles being built, dealerships are struggling to fill their inventory and consumers have ended up with fewer options on the lot.

The chip shortage won’t last forever though, so prospective car buyers can choose to wait things out for the new vehicle they really want. They can also go with their second choice in a new car or buy a certified pre-owned vehicle. It’s also never been a better time to trade in your car, and dealers are pulling out all the stops to get more trade-ins to fill their lagging inventory.

Everything Has Chips

Since the 1970s, when auto manufacturers started putting electronics in cars to reduce emissions, the number of electronic features has only grown. Chips control everything from power windows and seats, automatic climate control systems and infotainment systems, to driver-assist features like adaptive cruise control and blind-spot monitors, said Sam Abuelsamid, principal analyst with Guidehouse Insights, a market intelligence firm focused on emerging technologies.

“Anything that has a switch, control, screen, or comfort feature is probably controlled by a chip these days,” said Abuelsamid, who has worked in the auto industry for over 30 years. “The challenge is vehicles are complex machines, and you can’t ship a vehicle unless it has the thousands of parts that go into it.”

For example, Ford has numerous storage lots where they’re storing thousands of F-150 trucks that have been built but are missing specific electronic components containing semiconductors. Ford is waiting to get those needed chips to install in the trucks before they can be shipped out, Abuelsamid said.

Sam Abuelsamid, Principal Analyst, Guidehouse Insights/Image Credit: Sam Abuelsamid

The State of the Problem

The problem started last year during the early days of the Covid-19 pandemic. Auto manufacturers had to shut down their plants because of the lockdown. Assembly plants also keep less parts on hand than they used to, according to Abuelsamid.

“It used to be companies would have several weeks’ worth of parts in their assembly plants. Over the last 30 years, that has shifted to just-in-time production for cost reduction,” said Abuelsamid, who added Toyota pioneered the just-in-time production. “If they’re buying from suppliers but not using them for weeks, they still have to pay for them but aren’t making revenue.”

It’s also a quality issue. For example, suppose there is a production issue along the supply chain. Those parts get to the assembly plant and then they realize there is a problem. In that case, they can find the affected chips quickly and won’t have a considerable supply of defective parts, Abuelsamid said.

However, the risk of having less parts is that auto manufacturers only have a few hours of components on hand, including seats, tires, etc. Delivery trucks come in throughout the day with supplies, he said.

“This is a very short supply chain, and if there is a disruption, things can propagate quickly,” Abuelsamid said. “Auto manufacturers started canceling orders from suppliers, including chip manufacturers, so they didn’t have to pay for parts they weren’t using right away.”

Because of this, chip manufacturers shifted production from auto to other components where there was more demand, like personal computers and video game systems. Then, when automakers were ready to ramp up production again, there just weren’t enough chips to go around for everyone, he said.

The second half of 2020 also brought problems for the chip manufacturers as they had their own supply issues. In addition, a sizeable Japanese manufacturer had a massive fire at one of its plants which caused even more disruption.

Another problem is that the auto industry doesn’t tend to use the newest chip technology in their vehicles. Instead, the chips are often older generation because of proven technologies that are more robust for the auto environment, Abuelsamid said.

The Way Forward

“Auto manufacturers are trying to get supply chain issues sorted, but also scrambling to update components with a newer generation that is smaller and more available,” he said. “It’s a complicated process. Manufacturers are changing to more modern electronic architecture and are starting to consolidate into fewer computers that are more powerful.”

Abuelsamid anticipates the chip shortage will sort itself out in the next year.

“All of these things were building on top of each other,” Abuelsamid said. “Any kind of disruption just gets amplified. Hopefully, towards the end of this year and the beginning of next year, we should be back on track.”

Hayley Ringle

Hayley Ringle

Hayley Ringle has been an automobile enthusiast since her first motorcar love, a no-frills, air-cooled, orange 1976 VW Super Beetle. Hayley now enjoys driving her limited-edition Release Series 9 ride, an orange 2012 Scion XB, with vanity license plate HOTLAVA. Hayley’s fondness for cars stems from her dad’s love of British sports cars and her years working at an auto parts store while in college. She has written professionally for Phoenix-area newspapers for over 20 years, covering every subject imaginable, including Scottsdale’s car auctions and the Valley’s vehicle proving grounds. Her dream car is a Jaguar E-type roadster featured in the 1971 cult classic film “Harold and Maude.”