The global chip shortage that has severely constrained production of new cars since 2020 is expected to continue well into 2023 and potentially into 2024. The shortage has forced automakers around the world to cut production, resulting in low car inventories and long wait times for consumers.
What caused the chip shortage for automakers?
The chip shortage stems from a perfect storm of factors that all hit the auto industry at once:
- Surging demand for consumer electronics like smartphones, laptops, and gaming consoles during the COVID-19 pandemic, which use many of the same chips as cars.
- Automakers had cancelled chip orders early in the pandemic when car sales slumped, leaving them at the back of the line when demand rebounded.
- A drought in Taiwan and a cold snap in Texas shut down semiconductor plants in early 2021.
- Other supply chain disruptions due to COVID-19, including plant closures, shipping delays, and shortages of components and raw materials.
Carmakers cut chip orders in early 2020 when the pandemic temporarily killed demand. But demand came roaring back in the second half of 2020, especially for trucks and SUVs. Semiconductor makers had allocated freed-up capacity to consumer electronics companies, forcing automakers to wait amid fierce competition for limited supplies.
How have automakers been impacted?
With market demand high but inventory low, the chip shortage has hit automakers hard:
- Lost production: Automakers globally could produce 7-10 million fewer cars in 2021 due to the chip crisis, analysts estimate.
- Plant shutdowns: Automakers have had to repeatedly halt production at plants in North America, Europe, and Asia when they can’t get needed chips.
- Reduced variety: Companies are prioritizing production of their most profitable models and trimming options to use chips more efficiently.
- Record low inventories: New car inventories in the U.S. stood at just 1 million vehicles in August 2021, down from 4 million pre-pandemic.
- Long wait times: Consumers face delays of weeks or months when ordering new vehicles.
Ford said the shortage could cost it $2.5 billion in 2021. GM, VW, Daimler, Nissan, Honda, and other automakers also report losing billions in sales due to the chip crisis.
When will the auto chip shortage end?
Experts caution that the chip shortage likely won’t be resolved until 2023 or later, despite automakers’ efforts to ramp up supplies:
- Chipmakers expanding capacity: Major semiconductor firms like TSMC and Samsung are investing billions to build new fabs and add production lines. But it takes years to build new foundries.
- Prioritizing auto chips: Suppliers like TSMC say they are trying to boost output of auto-grade chips. But consumer electronics still take priority.
- Increasing orders: Automakers are ordering well in advance to avoid shortfalls, but it takes months from order to delivery.
- Seeking substitute chips: Automakers are trying to tweak designs to use more readily available semiconductors, but redesigns take time.
“It takes roughly six months from wafer start to finished product,” said Volkswagen Purchasing Chief Murat Aksel. With lead times like that, the car chip shortage won’t end overnight even with accelerated efforts by chipmakers and automakers alike.
Expert forecasts on how long the shortage will last
Industry observers estimate the chip shortage and its impacts could last into 2023 or 2024:
- IHS Markit: Chip shortage will persist through 2022, with normalcy returning by Q3 2022.
- AlixPartners: Shortage will last well into 2023, improving in 2024.
- Ford: Chip shortage will continue into 2023, with gradual recovery.
- Volkswagen: Expects crisis to continue beyond 2022 and impact 2023 production.
- Stellantis: Chip supply to remain “very constrained” until 2023.
IHS Markit analyst Phil Amsrud summed it up: “We don’t expect the supply-demand imbalance to end in 2021… It will take until the third quarter of 2022 to get equilibrium in supply and demand.”
Factors that could extend the shortage
Some factors could potentially push the auto chip shortage into 2024 or beyond:
- Natural disasters: Droughts, storms, earthquakes or other events that halt production at chipmaking hubs like Taiwan could exacerbate shortfalls.
- COVID resurgences: Outbreaks and regional lockdowns could close chip plants, worsen supply chain issues.
- Geopolitical tensions: Conflict over Taiwan or trade wars could severely impact supply chains and chip production.
- Surging EV demand: Booming sales of electric vehicles, which can use 3-4x as many chips as gas cars, put added strain on supplies.
- Hoarding: Chip users hoarding excess inventory could prolong tight supply.
“If the world is hit by more supply chain shocks, another black swan event, then all forecasts are out the window and the problem gets worse,” said Forrester Research analyst Glenn O’Donnell.
Winners and losers from the shortage
The chip crisis has created distinct winners and losers across the auto sector:
Winners
- Chipmakers: Higher sales and profits for semiconductor firms like TSMC, Infineon, NXP as demand outpaces supply.
- Used car sellers: Prices for used vehicles are up 20-30% amid tight new car supply, boosting used car dealers.
- Electric automakers: EV-only companies seem largely insulated, with Tesla, Rivian, Lucid securing supplies early.
Losers
- Traditional automakers: Lost production and billions in profits due to shortages.
- Dealers: Missing out on sales amid low inventories, discounting less likely.
- Consumers: Paying higher prices for new and used cars and waiting months for purchases.
What automakers are doing to manage the shortage
Automakers are taking a range of steps to cope with the chip crisis and attempt to limit the damage, including:
- Cutting production of less-profitable vehicles to focus on high-margin trucks and SUVs.
- Stockpiling chips when they can get them.
- Renegotiating contracts with semiconductor suppliers to increase future supply.
- Using different chips in their vehicles when possible.
- Developing in-house chip manufacturing capabilities (as Ford and GM are doing).
- Partnering with chipmakers to secure future supply, as VW is doing with TSMC.
Car companies are also warning consumers about long delays and advising them to place orders well in advance. Inventory shortages could persist deep into 2023 even as the chip shortage itself eases.
Future mitigation strategies
Experts say greater transparency and cooperation is needed across the automotive and semiconductor supply chains to avoid similar crises. Recommendations include:
- More visibility into sales and production data between chipmakers and automakers.
- Long-term supply agreements between chip vendors and car companies.
- Potential government subsidies to support semiconductor manufacturing expansion.
- Buffering inventory of chips and re-shoring more production locally.
- Standardizing components and systems across brands to maximize interchangeability.
“The automotive ecosystem needs to learn from this crisis and change how the industry manages supply chains,” said Capgemini analyst Markus Winkler.
Conclusion
In summary, experts predict the global chip shortage hampering auto production could last through 2022 and into 2023 or 2024. Though chipmakers are racing to invest in new capacity, it will take years to significantly boost supplies. Meanwhile, strong consumer electronics demand, COVID-related manufacturing disruptions, natural disasters, and potential geopolitical issues involving key producers like Taiwan all pose risks of perpetuating the shortage. Traditional automakers and dealers have taken the biggest financial hit. But amid production cuts, all car shoppers are feeling the pinch of higher prices and long wait times that could linger for several more years.
