Analysis: Automakers awaken to a new pecking order as the chip crisis deepens

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© Reuters. FILE PHOTO: A worker on the Volkswagen assembly line in Wolfsburg

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By Douglas Busvine and Christoph Steitz

BERLIN (Reuters) – The semiconductor crisis that has battered the auto sector leaves automakers with a difficult choice: pay, top up, or risk marginalization as chipmakers focus on more lucrative business elsewhere.

Automakers like Volkswagen (DE :), Ford, and General Motors (NYSE 🙂 have cut production as the chip market has been tidied up by consumer electronics manufacturers like smartphones – the chip industry’s preferred customers because they are more advanced, higher-margin customers buying chips.

The semiconductor shortage – over $ 800 worth of silicon packed into a modern electric vehicle – has exposed the divide between an auto industry tainted by decades of just-in-time deliveries and an electronics industry supply chain that can no longer adjust to its will .

“The automotive sector is used to the entire supply chain revolving around cars,” said McKinsey partner Ondrej Burkacky. “What has been overlooked is that semiconductor manufacturers actually have an alternative.”

Automakers are responding to the shortage by persuading governments to subsidize the construction of more chip-making capacities.

In Germany, Volkswagen pointed its finger at the suppliers and warned them in good time in April of last year – when a large part of global automobile production was stopped due to the coronavirus pandemic – that demand is expected to recover strongly in the second half of the year.

This complaint from the world’s largest automaker cuts little ice with chipmakers who say the auto industry can both quickly cancel orders in a slump and call for investment in new production in a recovery.

“Last year we had to take employees off and bear the costs of transporting idle capacities,” said a source for a European semiconductor manufacturer who spoke on condition of anonymity.

“If automakers ask us to invest in new capacity, can they please tell us who will pay for that idle capacity in the next downturn?”

LOW-TECH CUSTOMER

The auto industry spends around 40 billion US dollars on chips every year – around a tenth of the world market. In comparison, Apple (NASDAQ 🙂 spends more on chips just to make its iPhones, says Mirabaud tech analyst Neil Campling.

Additionally, the chips used in automobiles are typically staple products like microcontrollers that were manufactured under contract in older foundries – hardly the latest manufacturing technology chip makers would invest in.

“Suppliers say, ‘If we keep making this stuff, it has nowhere else to go. Sony (NYSE 🙂 won’t use it for a Playstation 5 or Apple for the next iPhone, “said Asif Anwar of Strategy Analytics.

The chipmakers were surprised by the panicked reaction of the German automotive industry, which persuaded Economics Minister Peter Altmaier to write a letter to his counterpart in Taiwan in January asking his semiconductor manufacturers to supply more chips.

There were no additional shipments, and a German industry source joked that Americans would have a better chance of getting more chips from Taiwan because they could at least park one aircraft carrier off the coast – indicating the United States’ ability to Projecting electricity Asia.

Closer to home, a source from another European chip maker expressed disbelief over an automobile manufacturer’s poor understanding of how it works.

“We got a call from an automaker desperate for supplies. They said, why aren’t you doing night shifts to increase production?” said this person.

“What they did not understand is that we operated a night shift from the start.”

NO FAST FIX

While Infineon (OTC :), the leading supplier of chips to the global auto industry, and Robert Bosch, the leading Tier 1 parts supplier, are both planning to bring new chip plants into operation this year, there is little chance that it will the delivery bottlenecks will soon improve.

Specialized chip manufacturers such as Infineon outsource part of the production of automotive chips to contract manufacturers operated by Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). The Asian foundries are currently prioritizing high-end electronics manufacturers because they are experiencing capacity bottlenecks.

In the long run, the relationship between chipmakers and the auto industry will deepen as electric vehicles become more common and features such as assisted and autonomous driving evolve, which require more advanced chips.

In the short term, however, there is no quick fix for the lack of chip supply: IHS Markit estimates that the time for the delivery of a microcontroller has doubled to 26 weeks and that the bottlenecks will only bottom out in March.

This puts the production of 1 million light vehicles at risk in the first quarter, says IHS Markit. Executives and analysts in the European chip industry agree that supply will not catch up to demand until later in the year.

Chip scarcity is having a “snowball effect” as automakers are unable to prioritize building profitable models, said Anwar of Strategy Analytics, who predicts auto production in Europe and North America will decline 5% to 10% in 2021.

The head of the Franco-Italian chip manufacturer STMicroelectronics, Jean-Marc Chery, predicts that capacity bottlenecks will affect automobile manufacturers by the middle of the year.

“By the end of the second quarter, the industry has to cope with a lean inventory,” Chery said at a recent Goldman Sachs (NYSE 🙂 conference.

(Douglas Busvine from Berlin and Christoph Steitz from Frankfurt; additional reporting by Mathieu Rosemain and Gilles Gillaume in Paris; editing by Susan Fenton)

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