Introduction
In the race to provide safety and advanced features to the passengers, cars today have become much more complex than past. There is not a vehicle on the road that doesn’t have chips or circuits on board. In fact, the automotive industry has been advanced ever since it started integrating chips and other digital components in its autos. However, as the COVID-19 pandemic struck manufacturing units around the globe, the car manufacturers have faced an unforeseen problem, i.e., Chip Shortage.
With a lack of necessary circuits and semiconductors, the automakers are lagging to meet the customers' demand, and hence the total revenue is plunging down. Consequently, a greater inevitable financial loss in the range of billions is going to strike soon. Immediate and long-term solutions are required to mitigate this problem and save the drowning auto industry.
In this article, we will be overlooking a complete timeline of chips shortage. You will get to know the causes of deficiency, the effects on the auto industries, and some strategies implemented by the automobile giants to overcome the situation.
What is Chip Shortage?
When COVID-19 quarantines were initiated, the production of chips and silicon semiconductors was halted. As a result, the pre-manufactured stocks emptied in no time while there was still tremendous order to be fulfilled. Without necessary circuit components, the whole electronics divisions all over the world started crumbling down.
Every industry requiring complex electronics as a raw unit has been severely affected by this downfall. Some notable mentions are the computers and smartphone industries, gaming consoles producers, and direct tech-related manufacturers. However, it wasn’t foreseen that automobile industries would have to bear such casualties as nobody had thought about the chipset used in modern vehicles were also part of the global semiconductor family.
As such, the auto market has been greatly impacted by this shortage because the chipsets, which are the main components of controller boards and safety systems are not being delivered as per the orders.
What caused Chip Shortage?
This calamity has not occurred instantaneously, rather the flame was fanned by little lego blocks of divergent causes. Firstly, the pandemic shut down all manufacturers across multiple countries; this halted the production of new chips. Secondly, while media were covering the news of people stacking piles of toilet paper rolls in their homes, only a few experts were witnessing the growth in demand for electronic products.
Because of lockdown, with no access to the physical world, people diverted businesses, education, and entertainment to online. This created an unprecedented demand for PCs, gaming consoles, Smart TVs, and varieties of personal electronics products which pushed the chips manufacturers to focus on these specific products over other non-important industries at that time like automobiles. The manufacturers utilized the available resources to meet the demand for personal electronic products not concerning about others.
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Thirdly, the COVID-19 lockdown had closed the roads which drastically reduced the demands for new vehicles on the market. Responding to this, the automakers then shrunk the orders for parts containing computer chips from chip producers. Although the orders for new cars dived down initially, soon later the demands hiked. As the factories reopened, the demands skyrocketed like never before causing the automakers to fail to deliver their products.
Since then, without prior stock inventory, chip manufacturers have been unable to meet the automakers' demands causing global chips shortage.
What are the consequences?
The COVID-19 pandemic-induced shortage of chips has directly struck the automobile industries as well. Most major automakers around the world are facing difficulties in assembling their products without electronics. in addition, onboard electronics consisting of chips and circuits have been the backbone not only for complex functions like advanced safety features and entertainment, but also simple features like power steering and emergency braking. For most car companies, the production of units has declined critically in numbers.
The serious decrease in production numbers directly correlates to insufficient business for the manufacturing companies. As a result, the automakers are expected to bear losses of billions of dollars revenue because of chips shortage. For instance, an automotive and industrial division of a renowned consulting firm AlixPartners expected the loss to be around $110 billion in the year 2021. Likewise, a union of automakers named Alliance for Auto Innovation predicted that the effect may persist for the next six months. Further, multiple car giants like Ford, GM, and Fiat had closed down their outlets and manufacturing units across the US.
How automotive industry is fighting the crisis?
Image Credit: Nikkei Asia
To address the current situation, many carmakers are finagling chips from wherever they can. The situation has been so worse that they are preferring their own models with high demand to manufacture early than slow-selling ones. They are channeling the chips into more profitable vehicles like SUVs and pickups. Furthermore, these producers are manufacturing vehicles without chips and storing them until they get unlimited access to chips again. These were some short-term strategies.
To talk about long-term planning, many automakers are considering scaling up some small-scale industries to meet the soaring demand for chips. Likewise, they are analyzing and checking the supply chains to prevent the fore coming shortage caused by the bullwhip effect as before. Further, they are planning to reconsider the contracts with international chip manufacturing companies.
Conclusion
To sum up, the chip shortage caused by the bullwhip effect from the COVID-19 pandemic has hit the automotive manufacturers so hard that they are choosing over between their own products to deliver sooner than the less profitable ones. In addition, this decline in business has made losses of billions of dollars in the automotive industry. Channeling down the production and developing the chips at the domestic level may help in normalizing the shortage over time.
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