The Global Microchip Shortage, Explained—and What It Means for Your Next Car Purchase
Expect higher prices and limited availability well into 2022.
From video games to dishwashers and everything in between, buying just about anything requiring electronics has become outrageously pricey or near impossible to find over the past year, largely due to a significant shortage of the most basic building block of technology: semiconductors. This includes cars, which have become increasingly dependent on electronics over the past several decades. And it’s proving to be perhaps the most devastating supply chain disruption the auto industry has seen in decades—maybe ever, if you ask some executives.
As the global chip shortage rears its ugly head on the global supply chain, automakers find themselves competing against nearly every other market for a small slice of the semiconductor pie. New cars of all shapes, sizes and prices are in short supply, right as the car industry is counting on sales to bounce back as COVID-19 vaccines become more available, the economy starts to rebound and travel restrictions ease.
Americans are feeling the pinch this week in many states due to a cyber attack-related gasoline shortage, but that problem looks to be resolved soon enough. Unfortunately, on the semiconductor shortage front, things will get worse before they get better, and for consumers, this means fewer cars on dealer lots and potentially shelling out more money for their next vehicle.
How Did This Happen?
Over the past year and a half, the global supply chain has been hit hard by COVID-19-related complications. Factories have shut their doors—either because of a government mandate or out of an abundance of caution for worker health—causing a backlog in production and an increase in product demand.
Being locked inside for a year and change has influenced how many consumers spend their money. The sales of video game consoles, computer components, and other at-home entertainment skyrocketed as people needed something to do in their spare time. As consumers demand more electronics, one of the most important components of any circuitry has become something of a scarcity.
So what is a semiconductor, anyway? And why are cars affected if people are just going out and buying too many PlayStation 5s?
Semiconductors are a core building block in electronics. They are neither an insulator nor a true conductor—picture a drawbridge. When the bridge is up, it can be thought of as an insulator. Cars (electricity) can’t pass from one side to the other because the space between either side of the bridge is simply too large to jump—this is called a band gap. When the bridge is down, it becomes a conductor, and cars can travel from one side to the other without issue. However, when the bridge is partially closed, its band gap is small. This means that under certain conditions (when heat, light, or electromagnetic fields are applied), the cars can jump the gap, resulting in a conductive state.
Regardless of the industry, modern electronics use thousands, millions, or even billions of semiconductors on a single chip. And when technologically advanced vehicles begin making use of hundreds of sensors and controllers in a single car, you can see how easily a shortage of just a single component like a seatbelt sensor can affect the production of an entire model.
The auto industry also has tougher requirements for the semiconductor industry to meet compared to standard consumer electronics. Final products must have greater resistance to environmental factors, like extreme weather and vibrations.
Between increased demand, disasters, and COVID-related production limitations, this perfect storm is wreaking havoc across the globe.
Which Automakers and Vehicles Are Affected?
Ford originally anticipated a global production shortage of between 200,000 and 400,000 units, however, its latest estimates show that it could short as many as 1.1 million vehicles throughout 2021 despite posting a $3.26 billion profit in the first quarter. Affected units include the Ford Bronco Sport, Explorer, F-150, and Mustang, as well as the Lincoln Aviator and Nautilus—some pretty major and important models, including crucial new ones.
Ford says that it anticipates the shortage to cut even deeper during the second quarter and remains a problem until as late as 2022. The total estimate of lost profits for the year nears around $2.5 billion.
"There are more whitewater moments ahead for us that we have to navigate,” Ford CEO Jim Farley said when addressing the company’s first-quarter earnings. “The semiconductor shortage and the impact to production will get worse before it gets better. In fact, we believe our second quarter will be the trough for this year."
General Motors, which originally accounted for a global shortage of $2 billion in profits, has also been hit rather hard. At least five of its plants have been affected in some way by the semiconductor shortage. This includes Ingersoll, Spring Hill, Ramos Arizpe, and two plants in Michigan—Lansing Delta and Lansing Grand River. This affects the Buick Enclave, Chevrolet Blazer, Camaro, Equinox, Malibu, Silverado, Traverse, Cadillac CT4, CT5, XT4, the GMC Arcadia and Sierra.
Honda suspended production of “most of its North American factories” in March. Production of the Accord, Civic, Insight and Odyssey have been limited in some manner throughout the shortage, as has the Acura RDX.
Hyundai’s North American operations appear to be largely unaffected at this time, as its Alabama plant continues to churn out vehicles. The automaker told The Drive that it continues to manage its semiconductor and microchip supply effectively and that its purchasing team at its Alabama plant is working with its global teams to prioritize allocations based on market demand. While Hyundai’s vehicle supply seems fairly stable, the automaker did temporarily idle its Ulsan, South Korea plant in April, which builds the U.S.-bound Accent.
Jaguar Land Rover has also reportedly begun idling its Birmingham, U.K.-based plant which manufactures the Jaguar XE, XF, and F-Type. The stoppage also extends to the Land Rover brand which manufactures its Discovery Sport and Range Rover Evoque vehicles outside of Liverpool.
Mercedes-Benz will reportedly halt production at two of its German plants, Bremen and Rastatt, for one week at minimum, resulting in production delays for the GLC and new electric EQC (which the U.S. will no longer see anyway) crossovers.
Nissan’s operations in Smyrna, Tennessee have been undergoing production challenges since at least March, leaving vehicles like the Leaf, Maxima, and Rogue at the brunt of the chip shortage. The Altima, which is produced in Mississippi and the Kicks and Versa crossovers, also experienced shortages during the same timeframe.
Stellantis (née Fiat Chrysler) experienced shortage-related production issues at eight of its 44 total global manufacturing facilities. It previously idled its Brampton plant (where the Dodge Charger and Challenger are produced), as well as its facility in Toluca, Mexico where the Jeep Compass is built. The Detroit-based Jefferson North Assembly Plant will also have its production limited throughout May, meaning a production cut for the Dodge Durango and Jeep Grand Cherokee. The Ram 1500 Classic was also affected when the Warren Truck Assembly plant was temporarily shut down due to supply issues, with partially completed trucks being pumped out and stored until shorted parts became available.
According to Stellantis CFO Richard Palmer, the company is bunkering down and is planning for the worst. During its financial reporting, Palmer weighed in on the shortage, noting that the impact could continue well into 2022: “We don’t have great visibility,” he said. “As such, it would be imprudent to assume the issue is going to go away.”
Subaru’s operations in Lafayette, Indiana experienced a temporary shutdown in April as well. This affected the output of as many as 15,000 vehicles, including the Ascent, Impreza, Legacy, and Outback.
Toyota was initially unaffected by the shortage. The Japanese automaker—already arguably the industry leader in logistics management—had learned to stockpile electronics following the 2011 nuclear disaster at Fukushima and had remained in good standing for months compared to other automakers. But over time, it acknowledged that it would build fewer of some models, like the Tundra pickup, to ensure that it had continued capacity of units with higher margin or volume. However, the automaker recently had to idle its Toyotetsu plant in Ontario, Canada to combat an outbreak of COVID-19 cases. This led to a suspension in production for the Toyota RAV4 and RAV4 Hybrid, as well as the Lexus RX 350 and 450h Hybrid. While not directly semiconductor-related, it is a prime example of how fragile the global supply chain really is.
Volkswagen Group, which sounded the alarm in December 2020, won’t be unaffected by the shutdown. According to German news outlet Handelsblatt, the automaker idled production of its factory in Slovakia which builds the Volkswagen Touareg, Audi Q7, Audi Q8, and Porsche Cayenne.
Wayne Griffiths, President of Volkswagen's SEAT brand, echoes other automakers' worries that the shortage will continue past the second quarter.
“We are being told from the suppliers and within the Volkswagen Group that we need to face considerable challenges in the second quarter, probably more challenging than the first quarter,” said Griffiths in an interview with the Financial Times, later adding: “The name of the game this year will be flexibility. We have to try to build when we get [chips] available."
What’s Being Done About it?
Now that we’ve identified why the shortage is occurring, surely the auto industry has come up with potential solutions to solve the underlying issues, right? Well, yes and no.
Three major factors play into the shortage: supply limitations, technological limitations, and geopolitical limitations.
As of now, limitations caused by supply are being handled by semiconductor manufacturers working around the clock to play catch-up. Manufacturing around the world was working at a reduced rate due to COVID-19 constraints, meaning that supply simply couldn’t keep up with demand. This resulted in the disruption of just-in-time manufacturing and depleted caches of stock that may have existed.
While this issue can’t be solved today, it can be rectified by increasing manufacturing capacity moving forward. This has led to key industry players pledging to invest billions in semiconductor foundries across the world—though this could take years between the inception of an idea and the minting of the very first wafers.
Technological limitations are another story. Automakers often build out vehicles from start to finish with few variances to components unless a defect is spotted which requires a part revision. However, some automakers like Tesla are no stranger to rapid change.
During Tesla’s first quarterly earnings report of 2021, the automaker revealed that it was able to mitigate the effects of the semiconductor shortage by pivoting to new microcontrollers. Traditional automakers generally build massive amounts of the same part based on very specific components or contract directly with OEM suppliers which develop parts on their behalf.
Tesla, however, took a different approach and rebuilt its affected components from the ground up, all while rapidly developing firmware for the new devices. This allowed it to move between parts suppliers and reduce the effects of the shortage. An advantage to the old Zuckerbergian idea of "Move fast and break things."
Geopolitical factors represent yet another problem that may not yet be actualized. As foreign companies like Semiconductor Manufacturing International Corporation are added to the U.S. Department of Commerce’s Entity List, the companies which domestically destined goods can source their components from is shrinking.
The United States only produces around 12 percent of the world’s supply of semiconductors, which has easily created a foreign dependency on components critical to most amenities used by Americans every day. In his recent infrastructure proposal, President Biden called for $50 billion to boost U.S. production of semiconductors by creating productive incentives and the establishment of a National Semiconductor Technology Center for research and design.
When Does it Get Better?
The world's most valuable semiconductor company is Taiwan Semiconductor Manufacturing Company (TSMC). Companies like AMD, Apple, Nvidia, and more utilize TSMC for their core products, as do many upstream manufacturers who supply components for the auto industry.
TSMC has recently said that it expects to catch up with the “minimum requirement” for demand in the auto industry by the end of June, but that doesn’t necessarily mean that the shortage will end by that time.
The manufacturing of semiconductors themselves is just the first step in a long and complex global supply chain. TSMC’s chairman Mark Liu says that a further delay of between seven and eight months is possible before the replenishment can be felt by automakers. This means that the shortage is likely to carry on until next year, and consumers will likely be impacted until at least the second quarter of 2022.
To make matters worse, non-COVID factors have also played a part in the shortage. Japanese semiconductor manufacturer Renesas, which supplies nearly 30 percent of all chips for the auto industry as a whole, recently experienced a fire at its production plant in mid-March. The fire resulted in 17 damaged machines, up from the original estimated 11, which could take “several months'' to repair. The company has previously given a timeframe to return to full production sometime between the end of May and early July.
Meanwhile, there are still plenty of people perusing dealer lots in search of a new car. The market is rapidly rebounding from months of COVID-induced inventory shortages and customers who put off buying a new car during economic uncertainty. The result is new cars with inflated prices and customers clawing at the limited available inventory. Even the used market is ballooning in price.
So if you’re looking for the best deal on a new ride, now might not be the best time to buy, especially if you don’t want to be upside down on your loan in a few months.
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