The Chip Shortage that doesn’t exist
Since mid-2020 the term “Chip Shortage” raves through media. Daily cited by the car manufacturers in combination with urging comments they will build and sell less cars than predicted.
But is it just a chip shortage or might there be else?
Situation and production shortage
It is true, many manufacturers had to stop work in assembly and production plants for some time. It is known from Audi, BMW, Ford, GM, Mercedes, Stellantis, Subaru and Toyota, but there will be more, I suspect. In general, the microchips have been moved to those plants where there can be gained more profit. Cheap and simple models – those providing a small profit margin only – have been delayed in production and delivery or even have been taken off the ordering list.
Thus, the more expensive cars often are quickly available while customers of the simpler models have to accept long waiting times. However, the vehicles available sometimes cannot fulfill the promises made in the brochures: BMW delivers many models in September 2021 lacking the touch functionality. This upset many customers, also since BMW USA offered goodwill and financial compensation while in Europe BMW offered warm words only. The leader in electric cars, Tesla, reacted quickly and rewrote the software to run on alternative microchips. But Tesla as well delivered cars with less function, e.g., lacking USB-C sockets. However, they are in the process to retrofit these sockets but communications with customers happened a bit unevenly.
In general, and depending on the source, most analysts expect around 4 to 8 million less cars will be built in 2021 and together with the losses from 2020 the total losses will be well in the three digits millions of Dollars. Depending on the country and the region stocks at the dealers are as little as a quarter of the usual. Clients rarely find the desired car and, therefore, consider nearly new used cars instead, resulting in a rise of the prices of used cars in general – with desired nearly new used cars sometimes being sold at list prices. These distortions in the market and the resale values will see corrections between 2023 and 2024.
And the culprits?
Spoiler: the car manufacturers. Even if you dislike this fact the causes for the shortage of microchips are of technical and systemic nature and as such are with the car manufacturers themselves. Yes, the pandemic adds its effects but predominantly by putting a magnifying glass all over the situation. And there are car manufacturers being much less affected.
There are five aspects to look into:
- The partnership with the suppliers
- The state of technologies in electronics in the automotive world
- The strategic purchase resp. how it is understood today
- The knowledge about the processes at the microchip manufacturers
- The change in drivetrain and technology
The supplier as a partner
Putting the words “partnership” and “supplier” into one sentence will receive a smitten smile by the latter. Often, there is a deep dependency, and this is willingly utilized by the car manufacturers. “Legates” from the car manufacturers often visit the suppliers to ensure delivery times, quality, and prices. The fate of the suppliers is irrelevant if they can provide good and chap parts and can survive with these jobs. At the other hand, suppliers too can make car manufacturers depending on them with their own dedicated developments – like battery production has done already. However, such suppliers aren’t small enterprises anymore, but large groups.
The microchip industry is everything else than a local SME. From first-hand I learned car manufacturers want to handle microchip manufacturers like other suppliers: the ultimate order to leave a current customer meeting immediately to fly around the world, all backed by a hint about the agreed fines for the breach of contract in case of absence, for a quick exchange with a C-level manager which could have been done in 15 minutes video call tells the story. My source added: “I will remember such – forever.” And: “We adapted our priorities.”. The arrogant behavior of the purchase department and the management of the car manufacturers is devastating.
Old parts for old tech
About 100 small computers (ECUs) running partly proprietary software from at least as many suppliers are put into a car of recent build. Hardware and software are proven and run stable most of the time but their root bases on developments and technologies otherwise being transferred to the museum for some time. In automotive, parts and assemblies of a much-aged kinds are used.
On one hand, such parts no longer are made in large quantities and are longer kept in stock. On the other hand, producing such parts no longer is of profit. Interest in the chip industry for such orders is limited and as soon orders were cancelled on a big scale by automotive orders from other markets were advanced and due to high demand prolonged.
The countless approaches by the chip manufacturers towards the car manufacturers to go for more recent designs with more recent parts were repelled. This, since the car manufacturers get their electronic assemblies most of the time from suppliers and their goal is to keep everything as cheap as possible, thus interest among the parties to improve is minimal. Furthermore, suppliers neither have the insights into the challenges nor are they involved in strategic developments of the car manufacturers – the responsibility for the microchips therefore is with the car manufacturers, and they have to understand this first. But it is possible: one day the after the original article in German was published BMW announced to have signed contracts directly with two microchip manufacturers.
Slowly new tech is used. However, there is more and dedicated software for networked systems needed, for instance new functionalities like Over-The-Air updates digging deep into the vehicles – nothing a supplier can and should do. And this is causing headaches with the car manufacturers as we were able to observe with the much bumpy introduction of the Volkswagen ID.3. Software is a core mission for the car manufacturers – but they are not ready for it, yet.
Purchase and strategy – a little bit
The purchasing depts. of car manufacturers are the entry points in a world of high numbers but also the fight against autocratic procedures. The strategy of the purchase depts. focuses on quantity, delivery schedule, price, and to achieve the quarterly targets. And more discount, of course, since this will improve the bonus on the salary – what an absurdity. In case of some unforeseen events, they pass everything on to the suppliers, particularly the financial impacts. Furthermore, most contracts are in the favor of the car manufacturers.
In the pandemic a comprehensive joint strategy in purchase among car manufacturers and suppliers would have been necessary. However, no source was able to report structured cancellations, monitored shifting, joint search for solutions, and most important backstops. But in this situation the development of a revised strategy for critical parts and assemblies would have been necessary. Such issues like the relevance of vehicles, ordering procedures and their flexibility, replacement purchases, other suppliers, and also quick decisions in cooperation with production scheduling. What happened instead: orders were cancelled. Following up on this, the chip manufacturers looked out for other customers and during the pandemic they found happy customers in the areas of home, media, and office electronics. Very few car manufacturers and suppliers got the idea of having several millions microchips of .50 to 2 Dollars each in stock could be sensible in face of the hundreds of thousand vehicles which cannot be build, now.
Again, BMW shows how to do purchase by securing raw materials for batteries since they a re critical elements in production which need to be handled directly. Despite having no own battery cell production, the company now is actively involved and knows when, from where and in which quantities raw materials, like cobalt, needs to be purchased.
A microchip is like a good wine: it needs time
Car manufacturers have little clue about electronics and electric components. This is comprehensible since electronics and software never were big issues since they were part of supplied assemblies. Therefore, they have little knowledge how long it takes to prepare the chip production line at the chip manufacturer for a different chip and to establish a high-volume production.
Depending on the complexity if the microchip it consists of many layers which need to be stacked on each other in order to create the functionality of the chip. This is an elaborated process quickly summing up several hundred production steps with some dead time in between. Many of the production steps are semi-manual and happen in clean rooms which also consumes time. From order to delivery four and more months sum up just for the production. Due to the high efforts needed and the lengthy of the processes production capacities need to be reserved much in advance, thus resulting in delivery delays of 12 to 18 months. And all this for a very plain chip needed for a simple touch screen. A strategic purchase management is urgently required since a pandemic – or before that as seen in a flooding – can stall people and factories for many weeks.
Would a microchip factory just around the corner, e.g. in Germany, solve all problems? Well, partly, the time needed in production will not change, since four months in Asia are four months in Germany, too. The total time of 12 to 18 months would also apply to a plant in Germany. It all requires a strategic project and purchase management – one example: Tesla developed its highly integrated microchip in cooperation with Samsung and Samsung also produces these microchips. Production capacity was reserved 24 months ahead – at a time when the involved parties barely had an idea what they actually are developing. It is about time legacy car makers shift their focus from cast iron towards silicon.
Changes in drivetrain and technologies
It is undisputed, the future is about battery electric vehicles. This change is a huge challenge for legacy car makers since the core competence – the drivetrain – needs to be completely redone and developed. This isn’t an easy task when the terms “thermodynamics” and “exhaust gas treatment” are most often used in the R&D dept. And neither the factories, nor the platforms, applied technologies, and all procedures are suitable to build electric cars. Making a profit becomes tricky with cars built under such preconditions, as head of Stellantis Carlos Tavares, unveiled in an interview with Reuters early December. All these challenges can only be tackled if more value adding processes happen at the car manufacturers and the vertical integration is increased – which requires going deeply into microchips, electronics, and software. Leaving suppliers behind.
The drivetrain follow new systems and controls, lots of electronics and software. Meanwhile it is understood by the car manufacturers they are handing out a computer controlled product with many functions in communications, media and comfort. This implies customers being much closer tied to the company, particularly after sales – which is demanding for many legacy manufacturers. The idea of frequent updates and providing new functionality – resp. the inherited condition to do so – after having sold the product is awkward in a business where products usually see no further developments one year before their release. Legacy car manufacturers have troubles to accept while the new, younger competition particularly from the USA and Asia use this as an USP, a benefit to the customers, and a much-improved customer satisfaction. This already led to a challenging situation: In China, Chinese developed and built cars with their countless software functions gained a high reputation while cars form legacy car manufacturers of well-known brands are perceived as antiquated.
So, it is not a chip shortage the media is reporting about. But it is a self-inflicted scarcity of microchips, caused by the car manufacturers themselves. This is the symptom of the root cause of the aversion against electronics and software.
This will change. It must.
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