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Semiconductors – how does their lack affect car production?

15 November 2021

The problems in the semiconductors market following the global COVID-19 pandemic directly impact global car production. This crisis is a severe blow to all the major manufacturers.

It means that cars in the world’s largest factories are waiting months for individual components to be assembled. What is more, there are symptoms that the situation will continue for longer. Therefore, if you are thinking of buying a new vehicle, prepare to wait longer. 


Car manufacturing before the pandemic


The industry’s supply chain is based on collaboration between manufacturers throughout the world. In the case of semiconductors, factories are primarily located in China but also in the United States. From here, microchips go on sale to the international market. It is now difficult to imagine any production without them – microchips are found in virtually every electronic device, including car computers. 

The products are not true conductors, but they do not insulate electricity. Their properties result from the use of dopants. Because of that, they are widely fitted in various elements of car equipment. For example, semiconductors are used to manufacture transistors, which are crucial for the production of microchips. Without them, neither a smartphone, nor a computer, nor many other devices would work. They are also essential for creating many components in modern cars.

The concentration of the semiconductor market in the Far East initially was profitable for car manufacturing. Furthermore, the car market usually follows the Just-In-Time delivery system. It means that goods are supplied in a specific quantity so as not to occupy unnecessary storage space. Therefore, there is no room for significant surpluses. Volkswagen, Honda, Ford, Audi and several other brands have relied on this mechanism. 


What was the situation like during the pandemic?


Why did factories slow down, even though demand for cars was rising? To answer this question, we need to go back to the winter and early spring of 2020. Then, the pandemic first broke out in China, followed by significant restrictions implemented, often very disruptive to businesses. As a result, many factories could not operate due to limitations and staffing deficits, which contributed to the first delays and the subsequent shortages of goods. 

As long as there was at least a modest stock surplus on the car market, manufacturers could continue to deliver new vehicles. Production could be resumed in this sector, but that required reducing deficits, so factories often operated around the clock. The leading brands slowed down the operation of their assembly plants. 

As EU Commissioner Thierry Breton pointed out, Europe only accounted for 10% of global semiconductor production even before the pandemic. They are mainly manufactured in Asia, which was severely affected during the first months of the pandemic. The European Commission is calling for European companies to increase their share in this market to at least 20%, but it is a plan that will take time and involve huge expenses. 


Current situation – semiconductors, steel, supply shortages


The crisis has not been resolved due to many factors, which we will discuss in a moment. The shortages are still remarkable, and there is no sign that the semiconductor market is about to eliminate the cause of the problem. Delays are already so long that production cannot keep up with demand. That is causing issues in vehicle assembly. After all, numerous components are based on semiconductors, although many of them are merely accessories. 

The slightest whim can make a driver wait several months for their dream vehicle. Additionally, more and more brands have decided to take a radical step to remove some additional equipment from their models. As a result, cars may be sold without advanced multimedia but with masked openings to insert them at a later date. That neither sounds nor looks encouraging. 

Jim Farley, Ford’s CEO, has admitted that the semiconductor crisis is the biggest shock to motoring he has seen. The Volkswagen Fox, produced in Brazil, does not have a screen multimedia system, and factories in Poland have been temporarily closed since August. Due to warehouse voids, Honda already shut down production in Swinden for a few days in January 2021. Audi admits that the most crucial thing now is to sell the backlog of car orders.


A problematic situation in factories. What could it be the reason?


Semiconductors are the heart of modern electronics. The current situation, which acutely affects customers, has perfectly shown how flawed the supply system and market consolidation in the Far East are. However, these are fortuitous circumstances that are impossible to predict. Many of us, including experts, could not have predicted in 2020 how long the pandemic would last and what tangible impact it would have on businesses. 

Several factors have contributed to the crisis in the car industry. The first is the Just-In-Time delivery system mentioned earlier and the absence of large surplus stocks. The second is the small European market share in the production of such valuable materials as semiconductors. Finally, the problematic situation in car factories is a direct result of the COVID-19 pandemic in China. 

The crisis was unavoidable after the factory fire in Japan and the harsh winter in Texas, where many semiconductors factories are located. That proves how distant countries are bound together by business relationships that can be disrupted at any time by unforeseen impediments and crises. Unfortunately, in Europe, we are not able to make up the shortfall ourselves. 

However, that is not all. Semiconductors are also essential for manufacturing other electronic components, including the graphics cards that cryptocurrency miners use. Modern graphics cards allow for faster mining of electronic money and substantial profits. So, there is not enough valuable material left for all industries. 


What is the situation like for individual car manufacturers?


The shortage of semiconductors is causing significant problems with the availability of cars. In the case of Volkswagen, it is 3-4 months of waiting. Audi A1 will make you linger eight months, you will not get a Honda any sooner than three months, and you cannot buy a Ford Mondeo with a conventional engine at all – only a hybrid model can be considered. All that because an average car has more than 50 microchips in it. Official figures show that the mean waiting time for a new car is now five months, and it reaches 12 months for many. Moreover, following the laws of supply and demand, prices will also rise. 


Do supply shortages affect companies’ profits?


No precise data are yet available to determine what problems the current situation creates for the leading manufacturers. However, losses of USD 100 billion-plus can be expected. Millions of cars will not come off the line. The consequences, therefore, affect both the manufacturers and dealers. 


Demand has recovered, but there is still a shortage of cars 


After a short period of reduced demand for new cars on the motor market, it has now increased significantly. However, due to deficiencies in the supply chain, there is still a shortage of vehicles. Semiconductors from China go to Silicon Valley in the United States, where they are processed in microchips. That is why the fire in Texas was such a severe problem. The Just-In-Time system resulting in empty warehouses has hugely impacted the current situation in the automotive industry. And there are many signals that the shortage will last longer, especially since manufacturers first have to catch up on orders. And that is not easy when it takes several weeks of work to produce a single microchip. 


How do car dealers’ cope with shortages


It is no surprise that the missing semiconductors are a considerable obstacle to buying a car. That does not mean you cannot buy a new vehicle within a reasonable timeframe at all. It is increasingly possible to acquire an automobile without additional equipment. Peugeot produces the 308 model with an analogue dashboard to save semiconductors for top models. We can expect to see many cars with truncated equipment in the coming months. 


Semiconductors – how does their lack affect car production?
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Semiconductors – how does their lack affect car production?
The problems in the semiconductors market following the global pandemic directly impact car production. This crisis is a blow to all the major manufacturers.
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