Navigating the supply chain semiconductor disruption

COVID-19 created disruption and exposed supply chain constraints in every corner of the economy. But nowhere has the misalignment been as significant as in the automotive semiconductor supply chain, where hundreds of thousands of half-finished vehicles sit mothballed due to a lack of semiconductors. Exacerbated by the problems in shipping capacity in air and sea, the difficulty of expanding new chipmaking capacity quickly and a shrinking domestic semiconductor manufacturing capacity – at a minimum, the bottleneck in supply could last between six and nine months.

COVID-19 has taught businesses that they need to be more nimble – something that isn’t easy to do, especially in the automotive ecosystem.

The perfect storm

The shortage of essential automotive chip components – specifically integrated circuits (ICs) such as microcontrollers (MCUs) and application-specific integrated circuits (ASICs) – hit the industry like a Category 5 hurricane.

In the first half of 2020, there was a dramatic shift in semiconductor fabrication away from auto ICs, as carmakers slammed on the brakes and shut plants for two months during the pandemic. Automotive ICs, which had peaked at 10.4% of semiconductor fabrication market share in the last week of December 2019, fell to just 3.6% by the week of May 8, 2020, according to market researcher VLSI Research. “Auto IC sales [in] total dropped 44% over this period,” says VLSI Research CEO Dan Hutcheson. Meanwhile, total semiconductor sales rose 4% in the first half of 2020, as demand for home computing and networking equipment surged and chipmakers pivoted away from auto ICs (1).

Adding to the problem was the warp-speed transition from doom and gloom to fast and furious. Given the grim market outlook for car sales at the beginning of the pandemic, the supply chain did not plan for additional capacity. Suddenly, vehicle demand grew as consumers stopped using public transportation and ride-sharing services. This pandemic-related demand forced both new and used car sales to come roaring back, requiring the automotive supply chain to start back up.

Impact on the industry and suppliers

The impact on the industry will be heavy: The semiconductor shortage will cut $60.6 billion in revenue from the global automotive industry in 2021, an estimate that includes the entire supply chain — from dealers and automakers to large tier-1 suppliers and their smaller counterparts. “All the way up and down the supply chain, everybody is out some portion of money,” said Dan Hearsch, a managing director at AlixPartners (2). In Detroit, GM  could lose up to $2 billion, while Ford Motor may see a $2.5 billion drop (3). Manufacturing output in the first quarter of 2021 will be reduced by more than 670,000 vehicles, according to IHS Markit, and for the full year, lost production is likely to be almost 1.3 million vehicles:

• GM could lose an estimated 111,450 vehicle sales, according to AutoForecast Solutions (4)
• Ford is reducing shifts at two plants that produce its best-selling model, the F-150 pickup (5) 
• GM and Ford have confirmed plans to mothball partially built products until supplies become available
• Honda Motor and Nissan Motor, Japan's second and third largest automakers, will sell a combined 250,000 fewer cars (6)

Moreover, as companies battle over the limited supply of chips, the situation is certain to worsen.

How we got here

The microchip supply shortage stems from the COVID-19 pandemic, which has taught businesses that they need to be more nimble, which isn’t easy to do, especially in the automotive ecosystem. But COVID-19 is only part of the problem. As we’ve seen with so many other problems arising out of the pandemic, COVID-19 has simply brought to light a problem that’s been lurking in full view for a long time – and is not about to disappear. Indeed, American automakers face a deeper, more structural issue that goes beyond the current bottleneck.

The chip shortage proved that the automobile's notion as a computer with wheels is not just hyperbole.

In 1970, the electronics share of total vehicle cost was only 5% - five decades later, in 2020, electronics represented 40% of the share, according to SEMI. By 2030, electronics will represent 50% of the total vehicle costs as electric and autonomous vehicles become a reality (7).

Currently, a little more than 10% of semiconductors produced worldwide supply the automotive industry. But that number is expected to rise as connected, autonomous, shared and electric driving mobility trends take hold. Over the next decade, the automotive software and electrical/electronic components markets combined will grow from $238 billion in 2020 to $469 billion by 2030, a 7% CAGR compounded, estimates McKinsey (8). (See Mobility Trends.)

The geopolitical importance of chips

In a letter addressed to the Biden administration, the Semiconductor Industry Association pointed out that the U.S. share of global semiconductor manufacturing has steadily declined from around 37% in 1990 to 12% today (9). Focusing on global 300mm wafer capacity for the most advanced semiconductors, nearly half of the capacity share in 2020 concentrated in Korea and Taiwan, at 26% and 23%, respectively. The U.S. has about 12% share, while China has almost 14%, and Japan has 16%.

The U.S. currently maintains a stable chip manufacturing footprint, but the trend lines are concerning. Unless the U.S. takes significant steps, that 12% share will decrease (10). This decrease is largely because the governments of competitors offer significant incentives and subsidies to attract new semiconductor manufacturing facilities, while the U.S. does not, according to SIA.

Research is critical to advancing semiconductor innovation. But federal government investment in semiconductor research has been relatively flat as a share of GDP for many years. Meanwhile, China and others are increasing their government research investments. As a result, the U.S. is uncompetitive in attracting investments in new fab construction and our technology leadership is at risk in the race for preeminence in the technologies of the future, including artificial intelligence, 5G/6G and quantum computing. (See “Politics of chips.”)

Creating transparency in your supply chain

Parts suppliers and OEMs spent most of 2020 in crisis management mode as the industry addressed the pandemic's shifting landscape. Even those companies with robust supply chain risk management procedures found themselves struggling with the disruption. The chip shortage made clear the need for greater visibility into the supply chain by automotive suppliers and manufacturers alike.

In today’s modern automotive supply chain, hundreds of suppliers make up the complex network contributing to producing a single vehicle. But while most automakers have a reasonably good view of their tier-1 suppliers, their sight is dimmed the deeper they get into the supply chain network. Complex networks become opaque, obscuring vulnerabilities and interdependencies. Firms not only need to keep an eye on their major suppliers, they also need to keep their finger on the pulse of sub-suppliers to understand better what’s going on under the hood and to monitor and manage their risks.

With that information in hand, it is then crucial to identify alternative supply sources and deploy those. We’ve seen how the movement of semiconductors and other parts over sea and air has placed a strain on the automotive industry in the past year. We need to identify different ways of moving parts to assembly. To do that, we need to have a clearer view of the integrated supply chain to identify, react and control the disruption. Create visibility into your supply chain, determining the critical components, supply origin and alternate sources.

But while visibility is crucial in managing a crisis, it’s no panacea. Global supply chains are susceptible to disruption. McKinsey has estimated that significant disruptions to production now occur every 3.7 years, on average (15). But whatever the rate, supply chain disruption is becoming the norm – be it due to tariff wars, pandemics or extreme weather events.  

Putting resiliency into practice 

COVID-19 demonstrated the value of resilience, which until the pandemic had taken a backseat to optimized supply chains designed to achieve efficiency. In the face of disruption it’s important to think about resilience strategically and how to actualize it in practice.

Digitization can help companies dramatically increase resilience without enduring unsustainable increases in costs. Leveraging digital technologies can resolve the longstanding tension between efficiency and resilience. How can suppliers turn resilience into an actuality? Here are some key ways:

• Agility: Nimbleness and agility are functions of a resilient company
• Metrics: Develop metrics for measuring the organization’s resilience
• Scenario-testing: Run scenarios leveraging modern supply chain resiliency solutions designed to assess weak links in the supply chain 
• Best practices: Establish best practices and provide access to the tools
• Buy-in: Resilience is a function of the culture pervading the organization – and culture, in the end, is all about people

Your supply chain operations can be a source of vulnerability or resilience, depending on your ability to monitor risk, relieve pain points and establish business continuity plans. Baker Tilly has knowledgeable mobility and transportation professionals that can evaluate your supply chain to better prepare your manufacturing plant for the new chipmaking market.

References:

1. A fitful start to the year for automotive supply in North America, Automotive Logistics, January, 29, 2021
2. How Covid led to a $60 billion global chip shortage for the auto industry, CNBC, February 11, 2021
3. GM and Ford are warning investors of billions in lost earnings this year due to the global chip shortage, Business Insider, February 10, 2021
4. GM extends factory downtime; incomplete cars stored amid chip shortfall, Automotive News, February 9, 2021
5. Ford cuts output of F-150 pickups due to semiconductor shortage, Reuters, February 4, 2021
6. Honda and Nissan to sell a quarter of a million fewer cars because of chip shortage, Reuters, February 9, 2021
7. Microelectronics Power the Future of Mobility – Part 2: Opportunities for Electronics, Semi, June 22, 2020
8. Mapping the automotive software-and-electronics landscape through 2030, McKinsey & Company, July 9, 2019
9. Growing computer-chip shortage alarms Biden and Congress, The Washington Post, February 23, 2021
10. A fab future for the automotive sector, Automotive Logistics, January 29, 2021
11. Biden signs executive order calling for semiconductor supply chain review, The Verge, February 24, 2021
12. Biden Team Pledges Aggressive Steps to Address Chip Shortage, Yahoo Finance, February 11, 2021
13. Samsung considers four sites in U.S. for $17 billion chip plant: documents, Reuters, March 3, 2021
14. Biden Orders Broad Supply-Chain Review Amid Chip Shortages, The Wall Street Journal, February 24, 2021
15. Risk, resilience, and rebalancing in global value chains, McKinsey & Company, August 6, 2020