Semiconductor shortage puts brakes on automotive recovery

Anyone in the market for a new Peugeot 308 will be intrigued to find its dashboard fitted with an analogue speedometer instead of a digital display.

This has nothing to do with adding a little retro chic to the 308. Instead, it reflects the decisions car manufacturers are making in the wake of a global semiconductor shortage that has seen Peugeot prioritise chips for the digital speedometers of models such as the Peugeot 3008 SUV.

With the sort of elan you would expect from the automotive industry, a spokesperson for Stellantis – formed after the merger of Peugeot and Fiat Chrysler – told Reuters that the analogue speedo was ‘a nifty and agile way of getting around a real hurdle for car production, until the ‘chips’ crisis ends’.

The shortage of semiconductors has been brought about through a combination of factors, not least the global pandemic which ground production to a halt in 90 per cent of vehicle and component factories in China, North America and Europe.

“In turn, carmakers heavily reduced purchasing of semiconductors, just as demand surged for home computing, gaming and healthcare products,” said Matthew Walters, head of Consultancy Services at car leasing experts LeasePlan UK. “When semiconductor manufacturers restarted at reduced production, the limited volume available had already been prioritised elsewhere, leading to supply constraints as automotive markets picked up in the third quarter of the year. Demand for semiconductor-reliant technology is increasing, but supply is struggling to keep up.”

Walters added that five semiconductor manufacturers supply the automotive industry and two of them – NXP and Infineon Technologies – suspended production at their facilities in Texas during winter storms in February.

According to Walters, AutoForecast Solutions predicts semiconductor shortages to reduce vehicle production by 202,000 units during 2021, and a quarter of that lost volume will be in Europe. “European industry association ACEA expects supply constraints to remain until the third quarter of 2021, resulting in “considerably lower” production volumes and postponed deliveries for the rest of the year,” he added.

Sarah Riding, a partner at law firm Gowling, said covid has heightened attention to supply chain vulnerabilities, noting that forecasting, the use of technology to improve real time demand, and casting the net across a number of suppliers to maximise supply options should all be high up the agenda.

“For the immediate situation there are no quick fixes to the lack of planning,” she said. “Some [automotive manufacturers] are bringing forward the usual summer shut down periods in the hope that suppliers will improve stocks in that period, others are moving to a more limited production basis. Flexing the production schedules in these ways will help mitigate to some extent but it will not stop the interruption.  Chip manufacturers claim that automotive customers did not plan for demand enough in advance and with 3-6 month lead times the supply chain is under significant stress.”

“Chip manufacturers are investing $billions to help increase output capacity, but these shortages will not go away any time soon,” added Ian Nethercot, MCIPS, supply chain director, Probrand, a Birmingham-based technology services provider.

In February 2021 KPMG published its Global Semiconductor Industry Outlook, stating that car makers – introducing connected, electric, and self-driving vehicles - are increasingly important semiconductor customers. In its 2019 report titled Semiconductors – the Next Wave, Deloitte estimated that semiconductor components will cost $600 per car by 2022 and that in the next decade more semiconductor content will be added to automotive electronics and subsystems.

Rider believes a long-term solution could be for manufacturers to build in-house technology and capability to produce such critical components, an opinion echoed by Scott White, CEO at PragmatIC Semiconductor.

"Longer term, the industry should be actively developing models that support tighter integration of semiconductor manufacturing into critical supply chains," he said.

Simon Beresford-Wylie, CEO at Imagination Technologies, a company that develops processor solutions for graphics and vision & AI processing, believes governments can promote supply chain diversification by providing incentives for increased local chip production while fully remaining committed to global supply chains.

“In other words, increased manufacturing at home should be seen as a means of supplementing, not displacing, imports from abroad,” he said. “This is already underway in Europe, with the EU setting a target of producing 20 per cent of the world’s semiconductors – as opposed to its current 10 per cent market share – and is finalising plans to launch a government-industry alliance to achieve this. In the US, the Biden administration has ordered a full review of critical supply chains, including semiconductors, and is seeking to boost domestic chip manufacturing.”

He concluded: “The UK should consider doing the same as it sketches out its post-Brexit, post-pandemic future. It possesses many of the ingredients needed to successfully manufacture chips, from cutting-edge semiconductor companies and a highly-developed technology industry to well-established strengths in advanced manufacturing. But an overarching vision from government is needed if the pieces are to fall into place.”