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.
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.