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At the onset of the COVID-19 pandemic, the auto industry’s primary concern was the massive drop in car demand. But in recent months, that focus has shifted to supply issues. The market has reversed course, and orders have surged unexpectedly. Still, an automotive chip shortage is prompting OEMs to suspend production or remove popular features from their vehicles.
Sales revenue is struggling mainly because OEMs and suppliers cannot access enough chips and must stall production. While manufacturers of other electronic devices – such as laptops – have also cut production due to limited access to new semiconductors, the adverse effects in the automotive industry have been more substantial.
This article discusses events contributing to the automotive chip shortage, discusses new legislation to combat these deficits, and contemplates its immediate effects.
The Russia/Ukraine Conflict and Global Shipping Costs
The Russian invasion of Ukraine further complicates the semiconductor supply chain. Materials and components in short supply as a result of the conflict include:
- Palladium. Russia provides 30% of this rare metal, a vital semiconductor material.
- Purified neon gas. Ukraine delivers nearly 35% of this inert gas critical to chip manufacturing.
- Wiring harnesses. Ukraine manufactures nearly 15% of these components that relay information and electric power throughout the vehicle.
Another issue is shipping from these locations, independent of supply. Many semiconductors travel by air, and shipping rates have spiked while volume has plummeted. OEMs have lowered production quantities due to a lack of critical vehicle components, which has increased uncertainty by reducing demand for semiconductor-based parts.
Some experts suggest that the automobile industry adjust its strategy considering the persistent supply chain instability in the semiconductor industry. Companies might begin by concentrating on the ramifications of three crucial tasks that serve as the cornerstone of a strategic shortage management strategy:
- Establishing accurate short-term demand forecasts
- Developing robust technology maps
- Providing direction for long-term demand forecasts
These steps might help insulate against the ongoing chip shortage while access to the necessary raw materials remains limited.
Industry Expert Takes on the Automotive Chip Shortage
International incidents, combined with a sluggish pandemic recovery and aggressive inflation, create an unprecedented set of circumstances and an unpredictable market.
The future direction of the automobile manufacturing sector is still uncertain. The main contention is that there are so many issues at hand that experts cannot analyze all the factors involved.
Industry pundits do not know what to expect moving forward, and current forecasts differ significantly from analyst to analyst. Much of that uncertainty stems from statistics that demonstrate relative growth in short periods but net decreases year-over-year.
- Through Q2 2022, inventories were up 8.3% from January 1.
- New light vehicle (NLV) sales for July had increased by 2.5%.
- While both moves are in a marginally positive direction, that same July report shows those numbers are still 8.9% lower year-over-year.
These statistics do not provide the same clarity as they would in a “typical” market. It will be challenging for buyers and investors to establish a firm footing in the auto manufacturing sector until some of these extenuating circumstances are alleviated.
The CHIPS and Science Act
President Joe Biden signed the CHIPS and Science Act on August 10, funding processor manufacturers with $52.7 billion over five years to aid the U.S. in reclaiming semiconductor manufacturing lost to overseas companies.
According to the Semiconductor Industry Association, U.S. chip fabrication facilities, known informally as “fabs,” made 37% of worldwide processors in 1990 but dropped to 12% in recent years. The CHIPS Act looks to reverse that trend, strengthening an industry vital to many vehicles.
The law emerged after a chip shortage stalled manufacturing and demonstrated how much the U.S. auto industry now relies on overseas processors. An equally telling sign came from rare bipartisan support for the Act, which passed by 243-187 and 64-33 in the House of Representatives and Senate, respectively.
Domestic Chipmaking Timetable
However, automakers and dealers should not expect relief in the short run.
Building new fabs takes several years, and new capacity will not arrive overnight. Furthermore, most processors with stalled products use outdated chipmaking technology. Chipmakers are typically more willing to invest in cutting-edge processes that develop premium chips that power today’s most innovative technologies.
Building a few fabs cheaper will help U.S. manufacturing, but that alone cannot compete with the network of companies in Asia.
While the CHIPS Act funding is a positive step, domestic manufacturers have lost many capabilities that will take time and money to rebuild, possibly upwards of $420 billion to create a semiconductor supply chain in the U.S.
This legislation will boost the long-term U.S. standing around more robust chip production. However, it will do little to improve the distribution of older components still very much in demand for automobiles or go far enough in helping keep pace with Asian fabs.
Weathering the Storm Requires the Best Solutions
The ongoing automotive chip shortage precipitates an uncertain future – at least in the short run – for dealerships nationwide. Dealers must continue to find new and innovative ways to compete and make the most of their current inventories and fixed op services.
However, successfully navigating a market where the timing and size of new vehicle shipments are unpredictable can be challenging. To do so effectively and efficiently, your team needs the industry’s best technologies to help you maximize revenue and withstand a potentially prolonged inventory scarcity.
Contact us today and learn how Affinitiv’s innovative digital solutions can help your dealership stay afloat during these unprecedented times.
All | February 08, 2024