Semiconductor Shortages & the Automotive Sector: Contextualising the Challenge

Semiconductor Shortages & the Automotive Sector: Contextualising the Challenge

The shortage of supply of semiconductors and microprocessors is having a profound impact on the global automotive sector – with the first financial evidence of this impact expected to be seen in the OEMs’ Q2 2021 results, following a surprisingly robust set of Q1 performances. 

The causes of the shortage are linked to both COVID related issues but also changes to our working patterns. 

In a global market for semiconductors worth over $400 billion, the automotive market accounted for 12% of global demand, a distant fourth behind the communications, computers and consumer electronics segments. Lead times are often six months and longer.

(source: SIA 2020 State of the US Semiconductor Industry report)

When the OEMs dialled down requirements in 2020 due to the forecast COVID impact on new vehicle demand, those chips were swallowed up by fast-growing other sectors. Furthermore, planned capex investment by the chip makers was not invested. The result? It has proven difficult for the chip plants to satisfy the more recent increases in demand from the automotive sector.

This will, of course, remediate itself over time – and it must be remembered that a fire at the Renasa plant in Japan has hit some OEMs harder than others. Certainly, if chips supply becomes less tight in Q3 and Q4 2021 then there’s the prospect of OEMs recovering some of the lost production. However, many industry sources are braced for the impact to continue well into 2022.

One of the big challenges facing the sector is its extended supply chains.

OEMs typically have good visibility over their tier 1 supplier base, but quickly lose that visibility when it comes to tiers 2 and below. This is part and parcel of how the OEMs allow their tier 1 suppliers to manage sub-suppliers, with low levels of directed supplies.  But this also means the OEMs have limited or no control when a problem arises. Instead, they are largely reliant on the tier 1 to fix the problem.

The shortages are also resulting in the production and supply of new vehicles to the market to be restricted, which in turn, is leading to increased demand for used cars. This is certainly the case in the UK, where average used car prices increased by 4.8% in June 2021, according to CAP HPI. 

But this will also have a longer-term impact three years down the line. With fewer new car sales today, there will be reduced available stock after three years when a typical PCP contract matures – potentially creating another pricing bubble in the future.