Global semiconductor shortage will disrupt auto supply chain well into 2021

A global shortage of semiconductor computer chips, brought on by the Covid-19 pandemic, is impacting car production around the globe and continues to disrupt the automotive supply chain. Semiconductors – a crucial component for modern infotainment systems, driver aids and various electrical components – are in particularly high demand because of the pandemic-driven popularity of consumer electronic devices, including games consoles, laptops and tablets. 

This was compounded by an uptick in demand for new cars in the final three months of 2020 that beat forecasts. This meant manufacturers and suppliers were caught off-guard with late-placed orders, and long lead times in chip production could mean delays of several weeks. This crisis of chip availability is likely to run into many months more and well into 2021.

The issue first came to light in late-2020 in India and China but, given the interconnectivity of the global supply chain, it has quickly spread to other regions. The situation is very fluid at this point, with many OEMs being impacted globally says market intelligence firm LMC Automotive.

LMC says it expects OEMs to secure other sources and/or shift chip inventory around (where possible) to more profitable vehicles or those in higher demand. But that may not always be the case depending on the specifics of the chip. In addition, some OEMs began stockpiling chips late last year to protect production levels, so the shortage will not impact each OEM equally.

The market intelligence provider says its December 2020 Global Light Vehicle Production Forecast expected output to rebound by 16% (+13mn units) to 87.6 millionunits driven by inventory replenishment and recovery demand. Risks include a prolonged second wave of the virus and capacity constraints in the short-term. Downside risk to the 2021 forecast is greatest in Q1 with potential for 1.1 million to 1.8 million unit shortfall from our current forecast, depending on the severity and scope of the shortage. Risk remains for further disruption in Q2. The risk is expected to be lower, and should be alleviated, by the end of Q2, with the potential for up to 900,000 of additional volume under threat. With some H2 catch-up expected, total 2021 downside risk ranges from 1.3 million to 2.2 million  units. Output could potentially fall to the 85.0 million unit level. 2022 production is expected to continue to rebound to pre-COVID levels at 92.2 million units.

Global production semiconductor shortage risk
According to LMC, the impact of the shortage of semiconductors in the US market could be up to 10% in Q1 for a market already very lean on inventory – demand also at risk. It expects China to be down 10% in January with outlook improving subsequently with some chip stocks being diverted from Europe. Korea may avoid any measurable impact, as some stockpiling took place and chip production ramps up. While Europe does have some semiconductors inventory as a buffer, but impact also expected to be widespread.

Audi’s boss has admitted the problem will see huge production shortfalls and the furlough of more than 10,000 staff. Speaking to the Financial Times, CEO Markus Duesmann said the issue was “a crisis upon a crisis”, forcing production lines to slow to the point that up to 10,000 fewer Audi models could be built in the first quarter of 2021. 

Honda has paused production at its Civic factory in Swindon next week, due to a lack of the components – the third time in two months that the brand’s UK line has been forced to halt by supply bottlenecks. It currently plans to restart production on Friday 22 January.

Toyota’s Chinese production lines were hit last week too, while Audi and Volkswagen were reported to have reduced the working hours of nearly 19,000 German workers in light of the shortage. In total, it is esimated the whole Volkswagen Group could produce up to 100,000 fewer vehicles in this quarter. 

An LMC report says, “In China, Shanghai VW is expected to be hit hard in Q1 with 25% production loss in January. FAW could see similar declines. Other OEMs (GM, Great Wall) are expected to be less impacted. VW’s situation is heightened given its use of a customised ESP chip, something that is not commonly shared with other OEMs. China production in January is expected to be down 10% from our December 2020 forecast. However, given current inventory levels, demand is not expected to greatly impacted. Tier 1 suppliers are believed to have sourced inventory from Europe to secure supply in the Chinese market, which may help to ease the shortage in China.”

In the US, Ford’s plant in Louisville, Kentucky, was idled last week as the manufacturer was forced to pause production of its Escape and Lincoln Corsair models. Fiat Chrysler Automobiles took similar measures at its factories in Mexico and Brampton, Canada.

APAC: Production in Japan and India at risk
LMC says annual 2021 output (without including China) could be impacted by over 630,000 units (-3.0%) with Japan and India production seen as the greatest risk.

In India, Mahindra & Mahindra has reported an impact due to the shortage and Girish Wagh, President – CVBU, Tata Motors, speaking at an Autocar Professional webinar on January 18, confirmed that“the global semiconductor shortage, due to the shift to feed personal electronics, is creating a bottleneck in the smooth functioning of the supply chain. It is affecting Tata Motors’ CV operations as well.” LMC says “the loss expected to be significant with both suppliers and OEMs impacted. Mahindra & Mahindra already announced Q1 production cuts. The situation is still fluid as to the extent of the impact – potential for a 12% loss in Q1 and 10% loss in Q2.”

In Japan, an October 2020 plant fire at semiconductor supplier Asahi Kasei Microsystem has impacted chip supply. Japan is also seeing some chip diversions to the gaming industry from automotive. Honda and RNM have already reduced Q1 plans due to the shortage. Korea should not feel the heat of the global shortage of chips since the country has two of the largest semiconductor producers in the world, Samsung and SK Hynix with both ramping up chip production. GM Korea is a downside risk, given its global sourcing footprint

Inventory situation differs across markets
As per LMC, in the US, supply was holding in a 50-60-day range but fell below 50 as inventory levels continue to be constrained. Given the existing chip shortage, the USA is not likely to see normal inventory levels until mid-2021, or later. China was destocking heading into the pandemic. Given rapid rebound and restart in production, inventory has begun building again relative to retail demand. Europe saw a supply spike ahead of lockdowns but has since balanced supply and demand. With strict lockdowns and higher case counts, demand has cooled and stock has been increasing.