Industry News

Parts Shortage in the Automotive Industry

The automobile industry is at a crisis point. Shortage of parts worldwide has led to stalled production lines, empty dealerships, and disappointed consumers.

Photo of article about Silicon Chip Shortage causing big issues for automakersSource

Semiconductors, in particular, have been in short supply. These tiny silicon transistors, which underpin a global industry worth $3 trillion, have been hard to come by, grinding entire automotive supply chains to a halt.
The average car needs thousands of semiconductors for everything from powertrains to electronic systems. There can be no production without semiconductors unless manufacturers revert to analog systems. The New York Times aptly describes the situation as “a tiny part’s big ripple.”
It’s not only semiconductors that are in short supply. Supplies of other parts like blowers, motors, and condensers have also dried up. While this trend spells doom for the auto industry, there’s some light at the end of the tunnel.
But first, we’ll share our insights into the events leading up to this global parts shortage.

What Happened?

While several factors may have contributed to the shortages we are seeing, the ultimate cause is what Stanford professor Hau Lee calls the “the bullwhip effect.”

The Bullwhip Effect

The Bullwhip effect describes how a small action can cause a ripple effect that generates major consequences. It’s a bit like the analogy of how a butterfly flapping its wings causes a hurricane.
That’s what happened in the case of semiconductor shortages.
Most OEMs use the just-in-time production model popularized by Toyota. Companies only order as much stock as they need for immediate production needs.
When COVID-19 caused a slump in demand for cars, several car makers reduced production while others like General Motors, Ford, and Volkswagen shut down their manufacturing lines–even if temporarily. As a result, automotive industries drastically reduced their semiconductor orders. They also reduced orders for other manufactured parts.
Semiconductor foundries and other manufacturers, in turn, scaled back their supply to auto companies and focused on supplying goods to other sectors. In the case of semiconductors, to personal electronic manufacturers. It made perfect economic sense as the pandemic had led to a jump in demand for personal electronics like laptops, gaming systems, and smartphones.
By the third quarter of 2020, car sales bounced back unexpectedly, leaving automakers scrambling to meet demands. But by that time, chip manufacturers did not have spare production to meet the demands for auto companies in particular.

So Why Not Just Produce More Semiconductors?

Well, it’s easier said than done. It takes time to increase production. Furthermore, there are only a handful of companies that can manufacture semiconductors, which naturally creates bottlenecks.
Complicating matters further, it’s worth noting that many of the semiconductor foundries are located in Asia, especially in China, Japan, and Taiwan. For instance, the leading business in this sector by revenue is the Taiwan Semiconductor Manufacturing Company located in Taiwan.
Chart showing semiconductors foundries by revenue
That poses a logistical challenge. Supplies to North America and Europe, where many auto manufacturing companies are located, are affected by factors like shipping challenges, trade disputes, and unexpected delays.
With regards to the semiconductor shortage, building or expanding foundries is part of the solution. Intel, for example, is investing $20 billion to build two chip plants in Arizona. Yet creating these facilities will not solve immediate needs. It can take 3-5 years to build a facility.

Who is Being Affected?

The short answer? Everyone. According to a report by Goldman Sachs, about 169 industries are affected by the shortage of parts, especially semiconductors. Industries include construction companies, steel manufacturers, and even factories that produce soap.
photo of article about 169 industries being hit by global chip shortage
Source
The automobile industry is not left out. Almost every business in the automobile supply chain has been affected, something we at Fastbolt have experienced first hand. OEMs and consumers are bearing the brunt of this crisis.

Manufacturers/OEMs

Consulting firm AlixPartners estimates that car manufacturers would produce between 1.5 – 5 million fewer vehicles compared to previous years. Several manufacturers have been forced to reduce production.
For instance, in the first quarter of 2021, Volkswagen produced 100,000 fewer cars than the same period of 2020. The company even warned managers to prepare for worse conditions in the second quarter of 2021 and beyond. There are more examples.
Carmaker Stellantis recently announced that it would replace digital speedometers with analog ones. While the move only affects Peugeot 308 cars, there’s a chance other models will face the same fate.
American car-making giant General Motors (GM) felt the full force of the semiconductor shortage. They shut down three plants (Fairfax, Ingersoll, San Luis Potosi) and slowed down production in its plant at Bupyeong, South Korea, in February 2021.
photo of article about General Motors being hit by chip shortage
Source
GM has manufactured cars without some core digital parts and was forced to offer discounts to customers. Not only is this a costly problem, but it also impacts the brand image.
All these trends have contributed to car makers losing money. If the shortage of semiconductors and other goods is not addressed soon, carmakers will look to the future with dread.

The Way Forward

The big question is: what can be done to stop the shortages and manage these supply chain problems? Well, there are two elements to the problem. On the one hand, these shortages, especially in the semiconductor industry, have forced companies and governments to implement long-term policy changes to avoid such problems in the future.
The Biden administration has taken steps towards this goal. Joe Biden has signed an executive order ordering a 100-day review of supply chains. In addition, the government has also initiated processes for a $37 billion funding to identify solutions to semiconductor shortfalls. This funding is expected to drive the establishment of new semiconductor foundries across the United States.
In the shorter term, auto companies and other businesses need to source supplies during a time of unprecedented demand. That’s an issue we’ve been managing for our clients in the automotive industry and other sectors. By leveraging established relationships with our suppliers and partners, we’ve been able to help our clients during these challenging times.
If you want to partner with a company that will help you manage logistical challenges such as these, Fastbolt is here to help. We offer a wide range of services including, program management, proprietary applications & development, 3PL & supplier consolidation, kitting & assembly, compliance management, diversified sourcing & risk mitigation. Learn more about how Fastbolt can help you.

Prev Post

Next Post

Other Articles by