By: Zi Hao Wei and Jack Karpinski
At the beginning of the COVID-19 pandemic, automotive factories were shut down. While this occurred, the semiconductor industry shifted its supply to in-demand goods like graphic cards and game consoles. As demand for such “stay-at-home” goods raged, an issue occurred for the automotive manufacturers. As the reopening happened, they no longer had the supply of semis needed to build the technology-enabled vehicles of today.
The semiconductor shortage, according to experts, will run into 2023. However, significant trends have the potential to extend this and thus, impact the auto industry negatively for the coming years. In this article, we have determined three factors: scaling of semiconductor production, a push towards electric vehicles, and overstocking. According to a report by KPMG, auto manufacturers are expected to lose $100B US dollars in 2021 due to a semiconductor shortage.
The main issue with the intention to increase production is that classic cars require mature nodes (45 nm+) while most foundries being built are designed for newer process technology (28 nm and below). As traditional vehicles are built using technology that has been around since the iPhone 1, there’s a reluctance to switch to the newer technology due to the cost of the chip itself and the cost of modifying existing models to incorporate the new chips. Suppose auto manufacturers have the intention to switch to the newer technology. In that case, they will also have to compete for the newer chips as the same chips are being used for IoT, 5G, EVs, etc, which raises the per-unit production cost of vehicles. It is also challenging to ramp up production in a short period of time as most foundries take 3-5 years to be fully operational. Then, one must factor in the time necessary to manufacture the chip itself, which is at least another three months.
The second issue is the push towards electric vehicles. Omar Alghabra, Canada’s Transport Minister, has announced that all passenger cars will need to be electric by 2035. With the transition to EVs, it increases the demand for semiconductors as electric vehicles require more. The quantity required is to be increased while the performance of the chips also needs to be increased. Chips with smaller nodes increase speed and reduce power consumption. Since the range is a big factor in competitive advantage, electric vehicles need to acquire newer model chips to increase range as older chip models consume more power. Features such as self-driving will also need the most advanced logic chips. For example, at the beginning of 2021, Tesla signed a deal with Samsung for 5 nm chips, the most advanced chip in production on the market. These factors will also increase the cost of electric vehicles in the long term. The industry’s margin will largely depend on the markup they can charge for these features and the disposable income of its target market.
The last issue is overstocking. The semiconductor shortage has been in the news for quite some time, which has led to overstocking from many different industries. This phenomenon may lead to further shortages as companies suffering shortages may request more chips than what is needed for their production, which leads to reduced supply for immediate consumption. Auto manufacturers may need to pay a premium for semiconductors as the demand far exceeds the current supply.
Overall, the auto industry is rapidly evolving with the rise of EVs, and the lack of needed materials may slow down the adoption rate of electric vehicles. The outlook for the industry is quite grim from a production standpoint. However, demand is present as the price of cars is rising due to scarcity. If the supply of cars is inadequate in the coming years, demand will keep increasing as individuals leave city centers due to the popularity of remote work. The moment the semiconductor shortage ends in the auto industry, the companies will open the doors to El Dorado.