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Urgent, Auto Chip Shortages, Auto Manufacturing Faces Shutdown

During the pandemic, automakers braced for upheaval. They expect supply chain disruptions and sales to plummet. But it never occurred to them that one of their biggest problems would be out of stock a year later.

Robust demand for gaming systems, personal computers and other electronics in a world stuck indoors has lured supplies of semiconductors, forcing automakers around the world to scramble to buy auto chips as crucial as gasoline or steel.

Few automakers have been spared. Toyota has closed production lines in China. Fiat Chrysler Automobiles temporarily halted production at plants in Ontario and Mexico. Volkswagen has warned of production problems at factories in China, Europe and the United States. Ford said last week that it was idling at a Louisville, Kentucky, plant for a week due to a shortage.

When the pandemic hit, automakers cut auto chip orders in anticipation of a drop in sales. Meanwhile, semiconductor makers have shifted production lines to meet growing demands for chips used in products such as laptops, webcams, tablets and 5G smartphones.

However, a faster-than-expected rebound in auto sales caught everyone off guard. The ensuing shortage of chips is expected to continue into 2021, as it could take six to nine months for semiconductor makers to recalibrate production.

Dan Hearsch, managing director of consultancy AlixPartners, said: “Consumer electronics exploded. Everyone wanted to buy Xboxes, PlayStations and laptops, and cars went out of business. Then the auto industry recovered faster than expected, and that’s what the problem lies in.”

While the shortage isn’t expected to lead to a significant increase in car prices, buyers may have to wait longer to get the cars they want.

The auto chip shortage is rooted in the long-term forces reshaping the auto and semiconductor industries and the short-term disruption brought on by the coronavirus pandemic.

Over the past decade, automakers have increasingly relied on electronics to enhance the appeal of their products, adding features such as touchscreens, computerized engine controls and transmissions, built-in cellular and Wi-Fi connectivity, and collision avoidance systems that use cameras and other functions.

Industry analysts say a new car can have more than a hundred semiconductors, and the lack of even a single component can trigger production delays or shutdowns.

Long-term pressure on chipmakers to rein in production costs has also played a role. Semiconductor companies supplying the automotive industry, such as Infineon, NXP, Texas Instruments and Renesas Electronics, choose to manufacture their state-of-the-art chips through external manufacturing services from the foundry. But manufacturers also keep their factories to make simpler automotive chips, typically making them on 8-inch silicon wafers rather than the 12-inches used in more modern factories.

Manufacturers using older 8-inch wafers cannot quickly ramp up yields. Syed Alam, global head of Accenture’s global semiconductor consulting practice, said they haven’t been investing much in new equipment recently, and it’s hard to find new equipment now because the technology is older.

Geopolitics also played a part. In September, the Trump administration placed restrictions on China’s leading foundry, SMIC, which makes chips for cars and many other applications. Gaurav Gupta, a vice president at research firm Gartner, said the firm’s customers are looking for alternatives, creating more competition for chip supply from other foundries.

The chip crisis is just one example of how the pandemic has shaken the global economy in unpredictable ways. Automakers are expected to face supply chain shortages, the closure of rental car operations in early 2020 due to concerns that workers could infect each other, or because logistics companies have stopped delivering goods. Most U.S. auto plants were shut down for about two months last spring.

But suppliers and automakers quickly found ways to contain the spread of the virus inside factories and get assembly lines back up and running, with a less-than-expected impact on the supply of most parts.

The emergence of semiconductor shortages has endangered the entire industry, and global sales have plummeted. In Europe, for example, in 2020, sales in the automotive industry fell by 25%.

It all comes as automakers try to navigate a shift in underlying technology from internal combustion engines to batteries, exposing them to new competition from Tesla. The California-based company has become the world’s most valuable automaker and emerging Chinese manufacturers such as Nio.

Exactly how long the shortage will last is unclear. It can take 20 to 25 weeks from when a new order is placed to start producing chips and arrive in the automotive market across the supply chain, said Michael Hogan, senior vice president at significant chipmaker GlobalFoundries.

How to deal with auto chip shortages

“We’re doing everything we can to prioritize the manufacture of automotive components,” Hogan said.

The shortage is particularly acute for integrated circuits used to control engines, transmissions and other critical functions, said German automotive electronics supplier Bosch. “Despite the challenging market situation, Bosch is making every effort to maintain customer supply and further minimize the impact,” Bosch said.

Automakers and suppliers are reacting the most. Munich-based BMW said it could maintain production but was “monitoring the situation closely” and was in regular contact with suppliers.

There will inevitably be some repercussions for automakers under pressure from the pandemic. Honda said on Wednesday it would shut down some production at its plant in Swindon, England, which makes the Civic, starting Monday. Honda cited a variety of supply chain issues, including semiconductor shortages.

German supplier Continental, best known for tires and making electronic components, has called on semiconductor makers to increase capacity at foundries that make chips.

“Future investments in these foundries will be critical so that the automotive industry can avoid such supply chain disruptions in the future,” Continental said in a statement.

Munich-based Infineon said it would increase investment in new capacity in 2021, from 1.1 billion euros in 2020 to 1.5 billion euros ($1.8 billion). Villach, Austria, will produce 12-inch wafers.

But it will take time for semiconductor manufacturers to catch up. Meanwhile, the IT industry may have priority.

“The auto industry is back, but they’re no longer at the forefront of the chip production line,” said Gary Silberg, global head of KPMG’s automotive practice.