When the chips are down

Nowadays, microchips can be found in many everyday devices such as cell phones, computers, credit cards as well as cars, making them an indispensable part of our daily lives. The current microchip shortage therefore hits us all even harder. The background reads like a prime example of a textbook on supply chain management.

In the following article, we show how this shortage happened and what the consequences are for the automotive industry. Long story short; what happens when the chips are down.

Semiconductors consist of materials whose electrical conductivity lies between that of a conductor, such as copper, and that of an insulator, such as glass. In their initial state, semiconductors have similar properties to non-conductors. Certain external influences, such as temperature or light, can cause outer electrons to dissolve, resulting in semiconductors taking on the properties of conductors. Often high-purity silicon is used, which is obtained from quartz sand. The chemical material is cut into thin circular slices – known as wafers. Through exposure, varnishing and etching, three-dimensional structures are applied through which electricity is conducted – so called circuits. The individual chips are around one millimeter to a few centimeters in size and are packaged in a plastic housing before being built into electrical devices.

Strict hygiene regulations must be observed during production. There must be no dust particles or static electricity in the environment. Production is concentrated in a few markets. The main production country, with a share of around 50% of chips sold, is Taiwan.

Today, modern vehicles contain hundreds of semiconductors, especially in the infotainment system, digital displays and cameras. Electric vehicles in particular require an extremely large number of chips to regulate the complex battery system.

Demand for microchips is growing steadily, while supply has collapsed. Currently, demand for semiconductors significantly exceeds supply. According to estimates, the automotive industry will need around 85 billion semiconductors in 2021, taking around 12 to 13 percent of the total semiconductors produced in the chip industry. This corresponds to somewhat the same share which is demanded by Apple alone. The demand for semiconductors is expected to increase steadily in the coming years due to the electrification of vehicles.

Various factors combined with the now strongly increasing demand for new vehicles have led to the current shortage.

The first lockdown in spring 2020 has greatly reduced demand for new cars. Automakers have thus ordered far fewer chips than they would normally install. Since semiconductors have an expiration date, automakers also do not keep endless inventories in stock. Meanwhile, chipmakers looked for other customers in the market. Industries such as electronics and mobile communications experienced a strong boom despite or perhaps because of Corona, combined with a markedly higher demand for microchips.

Demand for new vehicles rebounded faster than anticipated. As automakers prepared to ramp up production again, they found themselves at the back of the queue for microchips. Microchip factories take up to six months to resume production of certain chip types, so automakers now face significant delays in their supply chain.

The most important raw material for the production of semiconductors is silicon. Although the semimetal is very abundant on earth, its utilization is a very energy-intensive process. Of around eight million tons worldwide, more than five million tons were produced in China in 2020. There were significant power supply problems in China in 2020, coupled with rising electricity prices causing some factories to shut down production. Some factories were also closed due to environmental regulations.

Around 12% of the microchips in demand worldwide are produced in the USA, especially in Texas. In February 2021 one of the worst winter storms ever hit the state of Texas, causing widespread power outages. Various microchip factories had to be closed as a result and were only able to resume production around 4 months later.

In addition, the Renesas Electronics chip factory in Japan caught fire in March 2021, damaging various machines and causing them to be out of action for around 100 days.

Boston Consulting Group (BCG) calculates that all car manufacturers worldwide will be able to produce between four and six million fewer vehicles than planned due to the chip shortage. This corresponds to a vehicle value of at least 110 billion Swiss francs. Volkswagen for example produced around 100’000 fewer vehicles than originally planned in the first quarter of 2021 and is likely to have added at least the same number in the second quarter of 2021. Further, Ford has communicated that they had to halve the planned number of units worldwide in the second quarter of 2021. The resulting delivery delays are highly dependent on brands and models but can be around two to six months. The current situation is expected to hopefully relieve in the beginning of 2022.