As technology advances and telecommuting and telelearning rise, the world's supply of semiconductors is getting strained on all sides. Chip manufacturers aren't able to keep up with this rising demand, and as a result, one industry, in particular, is feeling strangled by the bottleneck: the auto industry.
The silicon shortage began last year, but even in 2021, automakers are still feeling the pain. As a result, automakers have shuttered plants worldwide. Just recently, the nation's top car dealer, AutoNation, complained about missed opportunities due to these ongoing production cuts, according to Bloomberg.
The crucial question for automakers going forward is: just how long will the semiconductor shortage last?
Ongoing production cuts
Starved for silicon, automakers are having a rough go of during the first half of 2021. Ford
Other automakers aren't offering such definite timelines. Nissan
Most automakers aim to allocate their limited silicon supplies toward higher selling vehicles. But this is at best a band-aid solution for a much deeper problem, one which began last year and could have significant implications for the industry going forward.
Where have all the chips gone?
Automaker's current woes are mainly due to the corona-crisis and the nature of the semiconductor industry itself. When auto sales plummeted by as much as 34% last year, automakers scaled back their orders. This pullback happened just as the work and learn from home trends began to accelerate. Laptops flew off shelves as schools and companies alike swallowed up the world's supply of silicon.
Then late last year, the demand for new vehicles rebounded faster than anybody expected. Unfortunately for automakers, there weren't enough chips on hand to meet this new demand.
Headed into 2021, the work from home trend doesn't seem to be going anywhere. Looking ahead this year, automakers will likely face competition with consumer electronics firms for the world's increasingly limited supply of semiconductors.
The auto industry is at a marked disadvantage here, as generally speaking, chip foundries prioritize orders from consumer electronics companies. For one thing, there are a billion smartphones produced each year, compared to less than a hundred million autos. Not only that, but the low margin nature of the auto industry means automakers tend to pay less than consumer electronics brands. These factors put automakers at a marked disadvantage, a disadvantage that could weigh on the industry well beyond this year.
Chip shortages: Could it be a problem for years to come?
However, automakers do have some hope this year. On average, it takes 6 to 9 months for a chip foundry to fulfill an order from an automaker. The hope is that automakers began placing orders sometime last year when the current shortage began to emerge. But automakers who didn't get in front of the current shortage could be starved of silicon for much of 2021.
But the blame for the current production cuts doesn't entirely fall on the shoulders of automakers. The more significant issue going forward is whether chip manufacturers can keep up with the demand, which will only increase going forward.
On both the consumer electronics and automotive ends, the hunger for silicon is higher than ever before. In the coming years, as 5G devices become the norm, smartphones will need more chips. The Apple
Given the many years and significant investment involved in constructing new chip foundries, semiconductor manufacturers have no to spare if they want to satiate a world that's only going to get hungrier for more silicon.
In 2021 automakers' ability to weather the current chip shortage is mostly a matter of when they placed their orders. But, with the demand for semiconductors on the rise, the larger question looms, what if in just a few years chip makers can't fulfill these orders?