Auto chip shortage could stretch for years

Automakers and analysts have been optimistic in recent weeks that the worldwide shortage of microchips would work itself out in the second half of this year. But that upbeat prediction is changing.

Many are now concluding that there is no easy path out of the mess because of the cost and complexity of the semiconductor supply chain. The growing outlook: The auto industry may have to rethink how it sources chips until producers can fulfill commitments for new capacity — a process that will take years.

"I have been in this industry for 31 years, and this is a situation I have never experienced before," said Peter Schiefer, president of the automotive division at Infineon Technologies, one of the largest automotive semiconductor makers, especially for power electronics.

"This will not be sorted out in the next few weeks," he said, noting the long lead time needed to source and produce chips, not to mention the years it could take to build new production lines.

James Norris, an analyst with LMC Automotive, put it equally bluntly. The "latest incoming information suggests that production disruptions will be more severe than initially thought," he said, with the shortage "expected to drag on until the closing months of 2021 and undermine the capacity for automakers to catch up lost volumes in the second half."

The reality could result in lost worldwide production of 2 million to 3 million vehicles this year, said Ondrej Burkacky, a leader of consulting firm McKinsey's global semiconductor practice. North America could lose 719,000 vehicles this year, according to AutoForecast Solutions Inc. And LMC is forecasting that chip shortages will cost Europe 330,000 vehicles, with the main losses at Daimler, Ford, Renault and Volkswagen Group.

Even if constraints begin to ease in the third quarter, danger lurks because of the seasonal nature of semiconductor demand: Ahead are Black Friday in the U.S. and Singles Day in China, when buyers rush for holiday bargains on all things electronic.

"That's high noon for producing all the chips that go into these consumer electronics devices," Burkacky said. "I would expect the second half of the year to be tougher."

Automotive applications make up only about 10 percent of the total global semiconductor market, which has an estimated value of $530 billion.

But there is scarcely a system in a modern passenger vehicle that does not rely on semiconductors, from power electronics that control the flow of energy in an electric vehicle to infotainment and sensors that operate interior lights.

Asif Anwar, a director at consultancy Strategy Analytics who specializes in automotive semiconductors, says the total market for chips will reach about $66 billion by 2027 — almost double that of 2020.

But the automotive sweet spot is microcontroller units, or MCUs. Those integrated circuits are used in every domain — powertrain, chassis, body and advanced driver-assistance systems — where they are essential to the electronic control units that enable functions such as anti-lock brakes, stability control, airbags and automated parking.

"There are almost no systems that come to mind right now that don't have an MCU in them," said Phil Amsrud, IHS Markit’s senior principal analyst for ADAS, semiconductors and components.

IHS Markit found that an Audi Q7 SUV relies on 38 MCUs from seven different suppliers, including five each in the infotainment and chassis/body control domains.

Until new capacity comes online, some analysts propose that the auto industry could alleviate its supply problem by changing some of its purchasing methods. Companies could decouple chip sourcing from other components. They could commit to earlier purchase orders, build up a buffer inventory and even commit to continuing to order chips through auto sales downturns.

"The production of a car is a just-in-time thing, and it's the right philosophy," Infineon's Schiefer said. "But semiconductor manufacturing is a very complex, time-consuming process. If you bring these two systems together, you will typically need a buffer [of inventory] to decouple them."

Burkacky said auto manufacturers must realize they are competing for resources. "Automotive players need to rethink how they do semiconductor sourcing," Burkacky said. "They are not only competing against themselves, they are also competing against consumer electronics, against PCs and servers."