Supply Chain Challenge
Carmakers including Volkswagen, Stellantis, Daimler and Renault have had to idle European factories because of the global semiconductor shortage costing the industry billions of dollars in lost sales. We're now starting to get a sense of how the continent's auto industry will claw its way out of the predicament.
VW has a chip task force comprised of dozens of executives that's met this week on trying to contain the damage. Continental, the region’s second-largest car-parts supplier, has dispatched 800 of its staff to help counter the crunch, according to CEO Nikolai Setzer. The German company has stepped up freight operations and is working “24 hours, seven days a week” to solve the situation, he said recently.
Larger components maker Robert Bosch is setting up a $1.2 billion automotive chip factory in Dresden, Germany, and plans to start full-scale manufacturing there before the year is over. Bosch agreed to cooperate with Globalfoundries — an Abu Dhabi-owned chip manufacturer with plants in the U.S., Singapore and Germany — to develop automotive radar semiconductors that should hit the market in the second half of this year.
So after some serious finger-pointing, companies are starting to meet the bottleneck head-on. But will their efforts be enough to avert major damage to earnings? Of the $61 billion in sales AlixPartners expects automakers to lose to the chip shortage this year, the consultancy anticipates more than $13 billion to go up in smoke in Europe. Roland Berger has predicted it will affect automakers into 2022.
The crisis has played out like a perfect storm: near-sighted planning, supply-chain complexities and natural disasters combined to do the damage. The seeds were sown about a year ago, when the pandemic caused car demand to plunge. That prompted auto suppliers to slash orders for chips and other parts. As buyers returned to showrooms faster than expected, the industry tried to increase purchases.
Securing more chips was a challenge. Dominant manufacturer TSMC was busy servicing a stay-at-home-fueled boom in demand for tablets, computers and game consoles. Early this year, the power outages in Texas and fire at a chip plant in Japan have exacerbated the problem.
Demand for auto chips won’t let up anytime soon. A car from a premium brand can require more than 3,000 chips; if even just one is missing, the vehicle is incomplete. The industry is electrifying, and battery-powered cars tend to pack significantly more expensive chip content than those with combustion engines. Add to that a rising share of entertainment and autonomous-driving features, and it becomes obvious that carmakers will have to up their game sourcing semiconductors in the future.
TSMC is spending some $30 billion on new plants and equipment this year. It’s unclear how much of the capacity will go to European carmakers, as technology giants including Intel, Apple and Samsung typically get the bulk of the output. TSMC CEO C.C. Wei delivered a somewhat reassuring message Thursday, saying the company's auto customers can expect the shortage to be “greatly reduced” by next quarter. There will still be an overall supply deficit throughout this year, though, and potentially into 2022, he said.
U.S. carmakers have secured assurances from President Joe Biden that he has bipartisan support for government funding that will help address a shortage. European politicians also have called for building up a domestic chipmaking industry, an effort that could end up looking much like Germany and France's battery push that's spurred multibillion-euro projects. But in addition to a lot of money, expanding Europe’s chipmaking industry will take some time.
Bosch’s deal with Globalfoundries could be both a key near-term fix and a sign of how relationships between the automotive and the semiconductor industries will change. Carmakers until now have let several tiers of suppliers handle the sourcing of chips and may need to take more direct control over the tiny but vital electronic components.
Bosch is bypassing other chip designers like Infineon Technologies and NXP Semiconductors by working directly with a contract manufacturer to secure the best technology and, maybe more importantly, seize enough supply. Globalfoundries is getting visibility on how much it needs to produce and at what cost — a win for both sides and a concept that’s increasingly catching on, said Mike Hogan, who heads Globalfoundries' auto business unit.
“We’ve been engaged in a growing number of discussions with automakers and car-parts suppliers recently,” Hogan said. “The auto industry is realizing how vital semiconductor technology is to their future.”
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