The world has been experiencing a global chip shortage since the early days of the COVID-19 pandemic. This has led to dramatic spikes in the price of semiconductor chips, and many industries have struggled to acquire the chips they need to produce their products. This shortage has affected virtually every industry that uses computer chips in its products, including the automotive industry.
Here is a closer look at how the semiconductor chip shortage has affected the auto industry.
Causes of the Global Chip Shortage
Numerous events have occurred concurrently, interweaving to create the global chip shortage. Analysts have identified the COVID-19 pandemic, the China-United States trade war, the rise of cryptocurrency, severe weather, chip factory fires, and the Russia-Ukraine War as primary causes.
COVID-19
The demand for computers, network peripherals, and other electronics that use semiconductors skyrocketed due to the increased prevalence of remote work and remote schooling during the pandemic. However, COVID-19 lockdowns also led to the closures of many chip production factories, which caused a depletion of global inventories. The global supply of semiconductor chips was unable to keep up with this increased demand.
China-United States Trade War
The US Department of Commerce set restrictions on China’s largest semiconductor chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), in September 2020. These restrictions were imposed because of the economic conflict between the two nations. As a result, SMIC has had trouble selling to companies with ties to the United States.
Cryptocurrency
Cryptocurrency has become much more popular in recent years. This enhanced popularity led to an amplified demand for mining, which is a process that uses specialized computers. The demand for computers capable of mining reduced the supply of chips for other uses.
Severe Weather
Natural disasters have also affected semiconductor chip availability. The severe winter storm of February 2021 in Austin, Texas forced the temporary closure of two chip plants owned by Samsung and NXP Semiconductors because of a loss of electricity. The supply from these two plants was behind for months due to the storm. Droughts in Taiwan caused problems for chip manufacturers that use ultra-pure water to clean their factories and wafers. Fewer chips were produced in these factories as a result. Taiwan is a global leader in the semiconductor industry, so the impact of these droughts was global.
Fires
Fires at multiple semiconductor plants have further strained the global supply of these chips. In October 2020, a Japanese semiconductor plant that focused on the production of ADC and DAC components caught fire. In March 2021, another Japanese plant owned by Renesas Electronics ignited. This fire was particularly devastating for the auto industry, as Renesas Electronics supplies 30 percent of the global market for microcontroller units used in automobiles. In January 2022, the Berlin plant of ASML went up in smoke, affecting the production of EUV lithography equipment used in manufacturing chips.
Russia-Ukraine War
Neon is a noble gas that is necessary to produce lasers during chip manufacturing. The price of neon skyrocketed sixfold between December 2021 and March 2022 due to the previous factors, as well as political tensions between Russia and Ukraine. The supply was significantly stressed again when Russia invaded Ukraine in February. Ukraine produced approximately half of the global neon supply as a byproduct of Russia’s steel industry. Approximately 90 percent of the semiconductor-grade neon used in the United States comes from Ukraine. Semiconductor manufacturers have explored other suppliers since the war started, but new suppliers need at least nine months to increase production.
How the Chip Shortage Has Impacted the Auto Industry
Modern automobiles use between 1,400 and 1,500 chips on average, with some models using as many as 3,000. The auto industry accounts for 15 percent of global chip production and use. While the personal electronics market has taken the largest hit due to the global chip shortage, the auto industry has also been devastated by it.
At the beginning of the pandemic, automakers made inaccurate predictions that sales would plummet, and they canceled chip orders based on these predictions. They were then left unable to meet demand when demand skyrocketed instead. Chip manufacturers also had pre-existing commitments to the IT sector, which led to less availability of car chips.
Many of the largest American automakers were unable to complete production on large numbers of vehicles. Ford stored thousands of unfinished automobiles at the Kentucky Speedway while awaiting the chips it needed to finish assembly. Toyota responded by announcing plans to reduce global vehicle production by 40 percent. General Motors announced a production halt of nearly all its models at North American plants for 1-2 weeks.
Naturally, the shortage and these responses negatively impacted the industry. In the third quarter of 2021, automakers reported just two-thirds of the new car sales as there had been in the same period in 2020. This decrease was largely caused by insufficient supply to meet the demand due to chip shortages.