So, what happens when an OEM faces a shortage of supply? What mitigating actions can be taken?
The first, and most obvious, is to focus the scant resource at those vehicles most in demand and which make the OEMs the most profit. We have seen many manufacturers idling plants for various periods of times or decreasing the number of shifts being worked. It therefore makes sense to reallocate available chips to other vehicles which not only make more money, but may be strategically important to ensuring emissions targets are met - for example, allocating production to a hybrid model, rather than a highly emitting internal combustion engine variant.
Plant closures or reduced production volumes often create significant challenges throughout the supply chain, which is dependent on long term visibility on production volumes. To date, we have seen little in the way of supplier distress as a result of reduced volumes, largely due to suppliers still being able to take advantage of local government support packages, such as placing workers on furlough or short-time working schemes. But this could become more problematic in the UK post-30 September when the Job Retention Scheme comes to an end.Some OEMs have tried to find alternative sources of semiconductors. But this is easier said than done, given the highly competitive market and nature of the massive global tech companies who are also trying to maintain their own supplies.
Unlike most other parts of the global automotive supply chains, the OEMs are not the dominant force, and so the traditional customer-supplier relationship approach does not always work with the chip manufacturers.
There is also the question of whether alternatively sourced chips will be of the requisite quality.
The final thing that OEMs can do is to de-specify the vehicles they are making, in order to reduce the quantity of chips required for each vehicle. Cars have become increasingly complex over the past five to ten years, with many ‘bells and whistles’ included as standard options. This is partly demonstrated by the rise of the average list price of a new car in the UK from £29,000 in 2016 to over £44,000 in June 2021 (albeit this increase is also driven by other factors such as model mix).
(source: CAP HPI)
As an example, an analogue speedometer may be easier to source than the chips required for a digital display. Taking such actions will help the manufacturers keep a flow of new vehicles entering the dealer networks. It is then important for the dealers to play their part and sell what’s available - not just what’s on the customer’s wish list.
Nevertheless, this approach could prove tricky throughout Europe where many customers orders are bespoke as opposed to selling standard trim models from the forecourt. It will also be interesting to see what effect this de-specification will have on used cars and residual values in three years’ time.