The chip disaster just isn’t going away within the subsequent few months. Automakers and chipmakers should work collectively to handle the imbalance in demand, writes Ondrej Burkacky
For the automotive and semiconductor industries, the previous few years have been a journey of extremes. In each instances, the pandemic precipitated a devastating drop in demand. Then they each noticed an enormous rebound as customers sought to get again on the street and in addition elevated using computer systems and different units for distant work. And now, once more, the 2 sectors face the same state of affairs, albeit from completely different ends of the spectrum: coping with the persistent scarcity of chips.
Even with fabs working flat out, chipmakers haven’t been in a position to meet demand, and this case appears to be like more likely to final effectively into 2023. Boosting manufacturing is the apparent reply—however not a easy one. The semiconductor business has elevated its manufacturing capability by almost 180% since 2000; even so, capability is sort of exhausted. Constructing new crops takes a few years and lots of billions in funding.
The state of affairs has not improved over the previous yr. Certainly, the warfare in Ukraine has made issues worse. Ukraine accounts for 25 to 35% of purified Neon gasoline manufacturing, and Russia provides 35% of palladium, a necessary enter.
To place it bluntly, the auto business can not anticipate provide to satisfy demand any time quickly
Automakers want no reminding of this. Chip shortages have pressured quite a lot of to halt manufacturing, as Toyota just lately introduced. Others have reduce on choices. General, there have been 1.7 million fewer automobiles inbuilt 2021 than in 2019. Just a few carmakers had been in a position to safeguard earnings with manufacturing and gross sales methods designed to optimise margins. However that raises issues, too, resembling a scarcity of lower-margin automobiles and extra fluctuations in chip demand.
All semiconductor-enabled industries, resembling client electronics and wi-fi applied sciences, face this drawback. However the state of affairs could also be extra acute for the auto business. Carmakers and suppliers sometimes comply with a just-in-time manufacturing technique. Since many gamers didn’t anticipate the chip scarcity in 2020 and 2021, they’d restricted inventory obtainable, which disrupted the whole provide chain. On the demand aspect, automobiles are complicated and personalised merchandise, making it tougher to foretell wants. Lastly, the vehicles of the longer term will want extra chips, and extra subtle ones, as electrification, superior driver help programs, and related options develop into extra fashionable.
In response to those pressures, some carmakers have began to order extra chips than they want. Others are requesting “take or pay” contracts through which they’ll both settle for a sure amount of chips or pay a price if they do not want to take action; this association helps firms match chip demand to manufacturing capability. However these actions fall wanting being fixes. Build up stock, for instance, can work for a single firm, however exacerbates the general scarcity. Altering suppliers can be unlikely to assist a lot, as a result of it could possibly take six months to a yr; chipmakers should undergo a fancy qualification course of, together with assembly particular mental property necessities.
To place it bluntly, the auto business can not anticipate provide to satisfy demand any time quickly. They due to this fact must construct a basis for long-term strategic provide administration. Some are taking steps on this course, for instance by establishing warfare rooms devoted to figuring out as a lot as attainable concerning the dynamics of the market and the aggressive panorama. They’ve developed dashboards that mechanically generate and mix knowledge from a variety of sources to disclose insights on an organization’s provide chain and a semiconductor participant’s commitments. The purpose is to offer correct knowledge to tell decision-making, together with what applied sciences to prioritise.
Different short-term choices embody providing further funds to expedite the manufacturing of wafers when capability quantities to lower than 5% of manufacturing quantity and changing back-ordered elements with related however extra feature-rich items (for instance, swapping in chips with extra reminiscence).
These are all no-regrets strikes. They’re additionally solely a begin.
For long-term resilience, firms ought to create robust expertise maps that outline their semiconductor wants. These enhance transparency with suppliers, permitting the businesses to find out product growth extra strategically. Creating a clear-eyed view of provide uncertainties and their dependency on chosen elements makes for higher, extra knowledgeable decision-making. Carmakers may determine to re-engineer chips, for instance, or to scale back variations amongst automobile elements.
With a roadmap in hand, they’ll flip to demand planning, each short- and long run. Internally, gross sales groups can use superior analytics to forecast required demand, whereas manufacturing groups can use digital instruments to assist them allocate semiconductors to the correct areas. These steps will help handle points that intervene with chip provide, resembling a scarcity of perception concerning the semiconductor content material of next-generation merchandise.
However demand planning must go additional. In different industries, resembling digital tools, producers and suppliers share data. This helps each events to recognise small potential issues earlier than they develop into massive ones. The automotive business has not carried out this previously, as a result of it didn’t must. Now it does. A clear, two-way supply-demand evaluation can permit chipmakers to substantiate that they can fill orders and to allocate chips to potential prospects earlier. Constructing a shared long-term perspective on demand permits carmakers and chipmakers to contemplate investing in tasks collectively, and thus share the monetary burden whereas bettering the provision of low-margin or modern applied sciences.
Lastly, auto business gamers might need to rethink the way in which they construction contracts for semiconductor-related sourcing. They may make up-front quantity commitments extra binding, guaranteeing demand for as much as a yr for applied sciences frequent to a number of chips. They may additionally take into account making selective investments in supply-chain resilience. Pandemic-related supply-chain shocks had been dramatic, however can’t be thought of surprising. McKinsey analysis has estimated that firms can anticipate a supply-chain disruption lasting a month or extra each 3.7 years, on common. Choices embody dual-source manufacturing qualification with chipmakers; adjusting pricing ranges with provide ensures; and bundling volumes to realize better negotiation energy.
The important thing takeaway right here is that the chip disaster just isn’t going away within the subsequent few weeks or months. Automakers and chipmakers who work collectively to handle the imbalance in demand might really feel considerably much less ache—and acquire an everlasting aggressive benefit
Concerning the creator: Ondrej Burkacky is a Senior Companion in McKinsey & Firm’s Semiconductor Observe
