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Why is there a semiconductor shortage – and what does this mean for the automotive industry?

Semiconductors – known to many outside the sector as computer chips – are used to create a vast range of electrical products. They are vital to the manufacture of everyday items such as smartphones, televisions, digital cameras and games consoles – and they are also central components in kitchen appliances, commercial equipment, and, of course, vehicles, which rely on them for a variety of features, including speedometers and other dashboard tech.

These parts have been in short supply in recent years, leading to severe delays in the production of vital goods, not to mention the delivery of vehicles that rely on complex electronic systems to deliver the comfort and safety aspects that customers have come to expected from modern-day cars.

What has caused the worldwide shortage?

The rise of 5G has been raising demand for chips. 5G equipment relies on advanced semiconductor technologies; without them, it simply can’t function. The decision by the US to prevent the sale of semiconductors to Huawei back in early 2020 meant that chip makers in other regions were inundated with orders from the Chinese firm, placing many of the chips that were available at the time in the hand of the one company.

Cheaper-to-produce 200mm wafer chips have been especially in demand in recent times, as they are more frequently used to make lower value consumer products. The lack of 20mm manufacturing equipment, which was noted by industry news website Semiconductor Engineering back in February 2020, began to have a knock-on effect on manufacturing over 18 months ago.

From March 2020, the coronavirus pandemic served to compound these issues further. Factory closures, customer stockpiling and extensive advanced ordering swallowed up many of the available parts. Costs rose significantly, too, as shipping fees and air freight charges soared amidst a lack of labour and ever-changing travel and transportation restrictions. China’s market watchdog, the State Administration of Market Regulation (SAMR), even resorted to fining several car chip distributors for hoarding chips with a view to intentionally inflating prices and capitalising on the situation.

Additionally, many major manufacturing hubs have had to deal with unexpected crises that have caused even more delays. At a time when production was only just starting to get back on track, semiconductor factories in Texas had to close temporarily earlier in the year due to particularly intense winter storms, while Renesas Electronics Corp, a major player in Japan, had to cease operations for several weeks due to an onsite fire. These incidents dealt further unwanted blows to the supply chain.

What effect is the scarcity of semiconductors having on the economy?

As these silicon-based chips at the heart of most devices, a global shortage has been wreaking havoc with the supply of almost all electronic goods.

Consumers have found it difficult to get their hands on their favourite tech in recent times, which has understandably led to frustration and disappointment. But the engineering and manufacturing industries have, without doubt, been the hardest hit.

Carmakers in particular have been struggling to deliver vehicles to meet demand, with many ambitious projects now put on hold until chips become more widely available again. UK factories alone have been producing significantly fewer vehicles than before the pandemic, as this piece from Auto Express explains.

Ford, Volvo and Toyota have had to either slow or completely halt production at their factories, leading to delays in the release and delivery of new vehicles. The only silver lining is that the second-hand car market is booming as dealers struggle to get their hands on brand new models; but this is of no benefit to OEMs whose pipelines – and, indeed, financial health – rely on the successful delivery of long-planned future projects.

What can we expect from the next few months?

It’s thought that the chip shortage will drag on for some time, largely because building new factories and facilities to meet the heightened demand will take many months (and a great deal of investment).

According to this article from the BBC, both Intel and IBM have suggested that semiconductor shortages could last at least another two years, even if chip fabrication resources are shifted to different countries.

We understand that these delays are adversely affecting many of our clients and suppliers. Our team will continue to keep a close eye on the situation and share any developments as they arise.



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