Automobiles and electronics have been adversely affected by the COVID-19 pandemic and the subsequent semiconductor shortage. A previous paper from AIR touched on the economic ramifications from the Covid-19 pandemic as a stark reminder of the importance in understanding complex vulnerabilities in today’s interconnected world.
The beginning of the pandemic lockdown in 2020 led to a sudden drop in manufacturing due to hastily canceled orders and just-in-time practices. However, demand for silicon chips rose due to pandemic working conditions as consumers increased their use of laptop computers, 5G phones, gaming systems, and other IT equipment. By Q3 2020, demand for semiconductors had surged, creating a V-shaped recovery for personal computers, mobile devices, automobiles, and wireless communications.
The automotive industry consumes about 10% of the global semiconductor market. Semiconductors are critical to the manufacture of automobiles and are used for power management, safety features, sensing, displays, and vehicle control. Shortages in sourcing semiconductor chips continued into the spring of 2021, with major automakers such as General Motors, Ford, and Stellantis (formerly FIAT Chrysler Automobiles) having to close or reduce production of some models during Q1 2021. At that time, IHS Markit estimated that the semiconductor shortage would result in 672,000 fewer light duty vehicles being produced globally during Q1 2021 and that North America could see 100,000 fewer vehicles made. In November 2021, General Motors announced a restart in production at formerly closed plants.
Early in the pandemic, Toyota was the only automaker not disrupted significantly by the chip shortage due to mitigation measures developed with their microcontroller units’ suppliers after the 2011 Tohoku earthquake and tsunami. Despite its strong mitigation measures, Toyota was also affected by the semiconductor shortage when Renesas Electronics reported a fire at the end of March 2021 at its plant in Hitachinaka, Ibaraki Prefecture, Japan, which historically has provided 30% of the global market for microcontroller units in automobiles. Toyota is one of Renesas’s largest customers. Although Renesas restarted manufacturing in June, production lagged demand. By October, Toyota announced cuts to its November vehicle production by as much as 15% due to the ongoing semiconductor shortfall and difficulties obtaining supplier parts in Southeast Asia. However, Toyota does expect to meet its annual production forecast of 9 million vehicles by the end of its fiscal year in March 2022.
The European Automobile Manufacturer’s Association said that new car registrations were down by 25% in September 2021 from the previous year and that Volkswagen reported a 28% decline. Renault estimates that 500,000 fewer vehicles will have been produced in 2021 due to the shortage of semiconductors, and its profit outlook has been maintained by raising car prices and cutting costs. COVID-19 labor restrictions and the semiconductor shortage have contributed to a decrease in domestic UK car production by almost 30% from pre-pandemic levels. Globally, all major manufacturing regions in the automotive industry have been affected.
While COVID-19 has changed consumer spending patterns by increasing the demand for consumer electronics, the automotive industry’s move to electric vehicles is also increasing the need for chips. A typical gasoline engine car uses from 50 to 150 semiconductors, but an electric vehicle can use up to 3,000 semiconductor chips. The growing emphasis on electric vehicle manufacturing is certain to consume vastly more semiconductor chips in the future. While increased electric vehicle use will mitigate greenhouse gases, the dependence of the automotive industry on semiconductor manufacturing will become even more critical.
During Q2 2021, smartphone OEMs (original equipment manufacturers) and component suppliers reported that they were receiving only 80% of their requested volume of key components. By Q3 2021, some only received 70% of key components. Even the two largest smartphone manufacturers, Samsung and Apple, have become affected by the chip shortage.
Samsung looks to be reducing five potential flagship handsets down to three. Apple is expecting that the total number of iPhones produced could be lower by 10 million units due to the chip shortage. Investment firm Wedbush estimated that Apple will be short of more than 5 million iPhone 13s for the 2021 holiday season if consumer demand is consistent with current trends. Chip supply constraints are also expected to impact iPad production.
Smartphone availability is expected to recover in early 2022. Although bigger corporate players are better equipped than smaller enterprises to withstand large shocks, their capacity can still be overcome by protracted disruptions in the supply chain.
Lead Times for Semiconductors
After the increased demand for semiconductors in fall 2020, foundry companies ramped up production, and the lead time (time from order to delivery) for 8-inch wafers increased to 3–4 months in spring 2021, compared to 1–2 months pre-pandemic. During spring 2021, lead times for semiconductor chips extended to 15 weeks on average. In fall 2021, the average lead time for semiconductors is estimated at 21.9 weeks. The worsening lead times mean a continuing and prolonged squeeze on the supply chain for semiconductors.
In reaction to the insufficient capacity from semiconductor fabrication plants, as soon as the previous year 2020, a few companies have started to invest in and construct new facilities. TSMC has started building a 12-inch wafer fabrication facility in Arizona slated to begin volume production in 2024 and has partnered with Sony to build a new fabrication plant in Japan for 22- and 28-nanometer chips with production to start in late 2024. Intel is also building two new USD 20 billion foundries in Arizona. The current global shortage is most pronounced for 28-nanometer chips. While there is the promise of more semiconductor production in the future, current production capacity is generally fixed and unable to meet demand.
White House Response
The severity of the shortage has caught the attention of policymakers. As a reaction to the initial semiconductor shortage, on February 24, 2021, President Biden signed Executive Order (EO) 14017 for reviewing supply chains for semiconductors, large capacity batteries, pharmaceuticals, and other critical minerals. After 100 days of review, in June 2021, a White House report in response to EO 14017 evaluated the U.S. supply chain and advocated for more domestic investment and processes for strengthening onshore manufacturing. The conclusions of the report point out the deficiencies of today’s supply chains.
The Role of Analytics
To expedite national interests, a change in government policy is occurring to coordinate the vulnerabilities in the supply chain and reinforce critical infrastructures for manufacturing. The current economic climate highlights the inherent weaknesses in lean manufacturing and serves as an example for businesses and governments to develop strategies to mitigate future disruptions.
Although effective, business continuity that deploys inventory reserves, redundancy in manufacturing, and resilience planning can only do so much. Using data and analytics to stress-test these scenarios a priori can allow organizations to develop better business continuity plans (BCP) to future-proof themselves against impending disruptions.
Data analytics and risk modeling can help companies pre-emptively measure risk aggregations across product groups and industries and develop risk mitigation strategies. AIR’s robust supply chain model is the backbone of our consulting solutions. Underlying the model is our proprietary supply chain industry exposure database that contains 3.4 million supplier locations across 17 primary industries and our network database, which maps how products flow across the globe. Our consultants work with you to blend your (or your insured’s) known supplier data with our industry-level exposure database to provide you with a deeper understanding of your potential supply chain risk and risk mitigation strategies.