Global Microchip Shortage – Why the Car Sector is in Crisis
Motor is worst hit by scarcity of critical technology caused by “perfect storm“ of disasters
A global microchip shortage is having a huge impact on the motor manufacturing sector, with many leading brands experiencing production delays – and in the UK, new car registrations for July are the lowest since 1998, down 29.5% year on year, according to trade body SMMT.
“The automotive sector continues to battle against shortages of semiconductors and staff, which is throttling our ability to translate a strengthening economic outlook into a full recovery,” said SMMT CEO Mike Hawes.
He added: “The next few weeks will see changes to self-isolation policies which will hopefully help those companies across the industry dealing with staff absences, but the semiconductor shortage is likely to remain an issue until at least the rest of the year.”
The world’s biggest producer, Taiwan’s TSMC has said the shortages will extend into 2022, while analyst IHS Markit estimates that the shortage will cost the industry $60billion in lost sales this year.
What are the reasons for the global shortage of microchips?
A range of issues has affected the market, including:
- Covid-19 pandemic
From early 2020, factories producing microchips were forced to close, particularly in Asia where most are based. Although they are now reopened, there is now a massive backlog of orders. During lockdowns, home working and gaming rose and microchips were bought up in vast amounts by electronics manufacturers. Even rising numbers of crypto-currency ‘miners’ who use high-end chips impacted availability. New car sales fell during the pandemic, rising demand is now affected because there are insufficient components – a modern car can contain around 3,000 microchips.
- Political – legacy from Donald Trump
Actions led by the Trump administration led to a reduction in microchips from China as the US blocked technology transfers and imposed tariffs.
- Natural catastrophes
Production of microchips requires a vast amount of water and Taiwan is affected by drought – TSMC has been bringing in water in trucks. Other producers have also had disasters, such as the major fire that halted production at Japan’s Renesas and freezing conditions stopped manufacture in Texas.
- Other factors
Other reasons for supply hold-ups include the tanker that was blocked in the Suez canal and Brexit.
What are Microchips?
They are essential components for electronic devices, such as mobile phones, home appliances, and many factory machines. A microchip can contain tens of billions of tiny circuits on a small wafer of silicon. Silicon is a semiconductor – meaning it can either conduct electricity or contain it. On a chip, silicon transistors are miniature switches that are turned on and off by electronic signals.
Where are Microchips Made?
Microchips are largely manufactured in Asia, including Taiwan, China, Japan, the Philippines, Thailand, Vietnam, and Malaysia, although the know-how largely comes from the US. They are made in high-spec fabrication plants, which are expensive to build and involve lasers printing billions of transistors onto minute areas of the silicon wafer.
The US is keen to manufacture more microchips at home and is to engage TSMC to build a plant in Phoenix, Arizona that will cost up to $12 billion.
In March, the European Commission set out a plan to grow its share of the global microchip market to 20% by 2030 – the German car sector is lobbying hard for this as the most important producer in the EU’s economy.
This would put the UK in a potentially weaker position because of Brexit. There is also concern about Newport Wafer Fab, a UK microchip manufacturer in South Wales, which has been purchased by China’s Nexperia. There has been anger that the business, which had received state funding, was allowed to be sold off.
Motor Brands Affected by the Microchip Shortage
The manufacturer recently said it would cut worldwide vehicle production by 40% in September – it had planned to make almost 900.000 cars, but will now only produce 540,000 vehicles.
- Jaguar LandRover
The manufacturer is said to be one of the worst affected because its luxury cars contain more microchips. It has predicted a 50% fall in sales for the next quarter and told leasing companies that lead times for some of its models are now over a year.
Parent company Daimler said Mercedes-Benz production has reduced at three plants in Germany and temporarily halted in Hungary because of the microchip shortage.
BMW-owned Mini paused its production for several days in April because of the microchip shortage.
Volkswagen has not given any details as to products other than to say it expects this quarter to be “very volatile and tight” because of the microchip shortage.
Ford temporarily closed its Kansas City assembly plant, halting pick-up truck manufacture and its plant in Turkey also closed – the company said in 2021 it would produce 1.1 fewer vehicles than expected.
The group that includes Vauxhall, Citroen, Peugeot, Jeep, and Chrysler, will cut production by 1.4 million during 2021 and to date, some eight of its 44 global plants have been affected by the temporary closure.
Expert comment view from Company Debt
Company Debt director, Simon Renshaw, says: “It’s a concern that the fall in vehicle sales is holding back the UK’s economic recovery. The situation is extremely serious and will have knock-on effects on smaller companies involved in the supply chain, such as dealerships and leasing companies. It has also raised the issue of ‘microchip security’ and highlighted the need for innovation – Tesla, through proprietary software development, has been less impacted, for example.
“But, microchips are not all about the motor market and Goldman Sachs analysis found that the shortage affects some 169 other industries.
What is more, a shortage of technology is also preventing some employees from returning to their offices. Although we are seeing the supply situation improving, I expect to see the fallout from this microchip crisis continue, well into next year.”
- Microchips Shortage Report – Shortage Insights – http://fleetnews.co.uk