A hundred years ago Henry Ford suffered production shutdowns due to shortages of steel, rubber, glass and workers. But Ford could hardly have imagined the problem idling production at his eponymous company in the 21st century: not enough computer chips.
The global automotive manufacturing industry is straining under a critical shortfall in the supply of semiconductors, just one more manifestation of shifts in product demand and supply chains arising out of the COVID-19 pandemic. Many major automakers have been forced to scale back or close factories in response, and industry experts don’t expect a full recovery until at least the second half of 2021. Analysts estimate that the chip shortage will cost the global auto industry $60 billion.
Few of us fully appreciate the degree to which our cars are run by computers. According to a study by Deloitte, electronics account for 40% of the cost of the average American automobile, up from 20% in 2007. By the end of the decade, it will be more than half. Semiconductors now control almost every aspect of the vehicle, from the engine and transmission to steering, braking and even the timing of your windshield wipers. Today the typical mid-value automobile contains over 100 chips, so any disruption in the critical supply chain of these tiny brains is a show stopper.
Even before the pandemic-related economic collapse, supply problems were brewing due to the trade war instigated against China under the previous administration. Chinese firms, fearing additional embargoes, began hoarding chips to protect their own domestic supply. Apple and Samsung took similar precautions, stockpiling microprocessors, further constricting global supply. Meanwhile, fearing more strictures, large semiconductor customers in the U.S. and elsewhere shifted orders away from Chinese producers toward Taiwanese and Korean chipmakers already overburdened with orders.
Enter the coronavirus. In March and April of 2020, vehicle production essentially ceased. Uncertain of the timing of recovery, automakers delayed or canceled orders of subassemblies from suppliers on the assumption that demand for cars would be years in recovering. Most of the microchips in vehicles are actually contained within these parts manufactured by suppliers, and so the subcontractors reduced their chip orders commensurately. In the modern age of lean inventories and “just-in-time” production, there is very little slack in the supply chain to act as a buffer.