3 Solutions to Overcome the Chip Drought in Global Automotive

The shortage of suppliers and chips is posing a major challenge to the global automotive sector. The COVID-19 pandemic disrupted the supply chain, causing a scarcity of automotive semiconductors. As a result, OEMs are closing production lines or removing popular features from their offerings.  

The consulting firm AlixPartners forecasted a $110 billion revenue loss in 2021 for the automotive industry due to the semiconductor chip shortage. Since then, despite comprising less than 9% of chip demand by revenue, the automotive sector has experienced a significant increase in chip needs due to the growing integration of semiconductors in modern vehicles. 

This blog will investigate the reasons behind the supplier and chip shortages, and explore its long-term implications and solutions on the automotive industry. 

The Global Auto Industry’s Chip Crunch 

The reasons behind this crisis are multifaceted, ranging from pandemic-related disruptions to soaring demand and manufacturing constraints. 

Soaring Demand 

In recent years, cars have become like rolling computers, packed with advanced technologies. This surge in technology has caused the demand for semiconductor chips in the automotive sector to skyrocket.  

A Merit expert says, “These chips are the brains behind features like navigation systems, advanced safety mechanisms, entertainment systems, and more. As standard vehicles evolve into smart, connected machines, the need for semiconductors has grown immensely.” 

According to the Semiconductor Industry Association, modern automobiles may have 8,000 or more semiconductor chips and over 100 electronic control units, which account for more than 35 percent of total vehicle cost and are predicted to exceed 50 percent by 2025 to 2030.  

Car manufacturers have been racing to integrate these chips to enhance the driving experience and meet the rising expectations of tech-savvy consumers. However, this surge in demand, coupled with the disruptions which arose from the pandemic, has created an unprecedented strain on chip availability. 

Pandemic-Related Disruptions 

The COVID-19 pandemic has been a major disruptor, causing widespread supply chain interruptions.  

Lockdowns, factory closures, and workforce limitations during the pandemic have hampered the production of automotive semiconductors. In 2022, McKinsey’s report estimated that OEMs and Tier 1 suppliers will place orders for enough automotive chips to outfit around 120 million new cars. But annual vehicle sales would still only be around 83 million. The situation has only worsened since then. OEMs and Tier 1 suppliers are not able to procure sufficient quantities of chips, resulting in the repercussions of the pandemic being most severe in global automotive industries. 

Manufacturing Capacity Constraints 

Creating semiconductor chips is like crafting tiny electronic cities. The process involves intricate steps, including designing circuits, etching patterns onto silicon wafers, and adding multiple layers of materials. Each chip undergoes rigorous testing to ensure flawless functionality. This meticulous procedure demands precision and time. Chip manufacturers face challenges as they must navigate through this intricate and time-consuming process, slowing down the overall production. Increasing the capacity to meet the growing demand requires substantial investments in technology and skilled manpower. 

Supply Chain Disruptions 

Various disruptions in the supply chain, including natural disasters, shipping delays, and port closures, have added to the challenges. These disruptions have created bottlenecks in the timely transportation and delivery of essential components, exacerbating the chip shortage. 

Ongoing Impact on Vehicle Production 

Original Equipment Manufacturers (OEMs) and Tier 1 suppliers continue to grapple with insufficient chip quantities, leading to delays in vehicle production. The recent decline in automotive revenues is primarily attributed to this ongoing struggle to procure an adequate supply of chips. 

Industry-Wide Crisis 

The chip shortage has sent shockwaves across the automotive industry globally, impacting production levels, shipment schedules, and vehicle prices. Companies are currently operating in crisis mode, and the resolution of this predicament is not expected to be swift. 

3 Proposed Solutions to Tackle Chip & Supplier Shortages 

To combat the serious lack of semiconductor chips, a range of strategies have been proposed. 

One solution involves broadening the supplier base by identifying and teaming up with new chip manufacturers. Diversifying the supplier base ensures a steady flow of chips, reducing the risk of delays and keeping the car-making process going smoothly. 

Another tactic is to prioritise chip allocation for the most crucial vehicle models and features. Some OEMs are going the extra mile by ordering surplus semiconductors, around 10 to 20 percent more than needed, to ensure adequate inventory and safeguard production. 

Additionally, certain automakers are adapting to the situation by substituting back-ordered components with similar but more feature-rich alternatives and utilising consumer-grade chip sets that undergo extra quality tests. Ford, for example, has been retrofitting its F-150 pickup trucks with a different type of chip that is more readily available. The company has also been using a consumer-grade chip set that undergoes extra quality tests. General Motors has been using a similar approach by substituting back-ordered components with similar but more feature-rich alternatives. 

In conclusion, the complexity of the issue calls for a joint effort from both the auto and semiconductor industries to rectify the demand-supply imbalance. 

Merit’s Expertise in Data Aggregation & Harvesting for the Global Automotive Sector 

Merit Data and Technology excels in aggregating and harvesting automotive data using AI, ML, and human expertise. Our capabilities include: 

• Crafting end-to-end data pipelines and scalable data warehouses 
• Designing compliant governance solutions for seamless integration 
• Utilising high-volume, high-velocity data tools for nuanced insights 
• Extracting retail product attributes and audience data 
• Aggregating industry-specific data points for informed decision-making 

Trusted by leading automotive brands, Merit drives innovation and efficiency by delivering refined, actionable insights.

Key Takeaways 

• Complex Challenges in the Automotive Sector: The global automotive industry faces significant challenges due to a shortage of semiconductor chips, resulting from disruptions in the supply chain, increased demand, and manufacturing constraints. 

• Diverse Strategies for Mitigation: To tackle the chip shortage, proposed solutions include diversifying the supplier base, prioritising chip allocation for critical vehicle models, and adapting to shortages by ordering surplus and using alternative chip sets. 

• Long-lasting Impacts: The ongoing chip shortage has far-reaching consequences, leading to production delays, revenue losses, and a broader crisis in the automotive industry. The intricacies of semiconductor manufacturing processes and disruptions in the supply chain contribute to the complexity of the issue. 

• Collaborative Efforts Required: Addressing the demand-supply imbalance necessitates a joint effort from both the automotive and semiconductor industries, emphasising the importance of collaboration and strategic solutions for a sustainable resolution.