Automotive IC Shortages: How Did We Get Here, and How Long Will They Last?

 

According to a survey conducted by Nielsen Research, commissioned by Advanced Technology Services, Inc., the cost of stopped production in the automotive industry carries a hefty price. With responses that estimate anywhere from $22,000 per minute, up to $50,000 per minute, keeping production moving along smoothly is a high-stakes priority.

Shifting trends throughout 2020, combined with ongoing shortages and spiking demand for semiconductors have created concern surrounding automotive IC shortages that will easily last into the second half of 2021. Navigating a situation like this is paramount in the short-term, but there are long-term implications as well, namely the inherent flaws in existing strategies. Join us as we break down these factors, while also leveraging our unique industry perspective to offer additional insights.

The Perfect Storm: Shifting Demand and The Rise of Vehicle Electrification

Fourth quarter 2020 passenger vehicles sales were up  30% compared to the third quarter, but this growth could be tempered due to potential inventory issues and increased lead times due to production schedule changes as a result of electronic component shortages impacting multiple major global automotive brands. In general, the looming threat of a shortage tends to cause a surge of buying habits, if only to bulk up inventory and prevent delays or production shutdowns.

The other major factor here is the aforementioned demand shift, which is due to consumer habits changing over the course of 2020. In the second quarter of 2020, people were largely at home, locked down, and very few were interested in buying vehicles. Therefore, automakers slowed production to avoid having vehicles sit on the lot.

This decision led to semiconductor suppliers and their fabrication partners, such as TSMC, shifting their limited capacity towards new demand spikes in other industries, including consumer electronics and hyperscale computing to support digital services. With people working and going to school from home, the demand for things like laptops, webcams, and other consumer electronics surged upward.

What no one expected was that vehicle sales would go up in the fourth quarter of 2020. This shift left automakers scrambling to scale production, only to find out that the supply chains were facing critical component shortages across multiple tiers of suppliers. Distributors and key semiconductor suppliers had already sold through existing standard component inventories, and more custom ASIC chips would require rescheduling against new capacity allocations, with lead times shifting out several months. The seeds for a shortage were sown.

The electrification of the modern passenger and light truck vehicles has continued to accelerate in terms of both total cost as well as critical to consumer purchase decisions. Vehicles have been, and continue to compete fiercely with consumer electronics like smartphones, computers, and gaming consoles, for limited supplies of semiconductors. This particular shortage represents more of a “perfect storm” of factors coming to fruition at once.

Namely, we have a finite number of components to go around, and when automotive forecasted lower demand, other industries swooped in to meet their increased needs. Not only is this an example of increasing competition for key electronic commodities among automotive manufacturers, but also now across multiple downstream industries.  Due to key differences in product life cycles and supply chain practices, the automotive industry is particularly at risk.

The “Just-in-time” approach to manufacturing in the automotive world, combined with continued strain on global component inventory, highlights the immediate need for automotive supply chains to rethink their approach, in terms of risk mitigation, lead times, and a lack of focus on resiliency at the point of design.

Supplyframe’s DSI Network affords us a unique perspective into the ongoing situation. By analyzing changing demand and intent signals surrounding buying activity and component search, it’s possible to identify leading indicators of those commodities facing the most pressure from the shift in demand.

We have noted a significant increase in traffic, through the fourth quarter of 2020. Suppliers like STMicroelectronics, NXP Semiconductor, TDK, Renesas, and Infineon all showed spikes in traffic and spot buy ecommerce transactions in November and December, with lead times shifting out 13 weeks or longer on average.

The products that are showing the most impact are common electronics for automotive designs. These include components like MCUs, SoCs (system on a chip), interface and I/O ICs, microprocessors, application-specific integrated circuits (ASICs), and other discrete semiconductors.

These components tie directly into critical areas of these vehicle programs, such as engine management systems ECUs (electronic control units), infotainment systems, advanced driver safety assistance systems (ADAS), and other electrified subsystems.

With news breaking from automotive OEMs that delays are to be expected, we’re already seeing things like panic buying and scrambling to gather what inventory is still available. It’s also important to note that this isn’t an issue that will resolve itself in a month. Our predictions indicate that it could take until June or July of 2021 to see recovery.

Three Key Takeaways For The Automotive Industry

Supplyframe CMO Richard Barnett sat down with Spend Matters to discuss these ongoing shortages in January of 2021. He advised supply chain managers to seek out market intelligence that would offer a broad view of the production line. Furthermore, he recommended looking at competitors to gauge potential shortages within their supply chains.

As part of the discussion, several key pieces of actionable advice also emerged for manufacturers:

1) Build Resiliency at The Point of Design 

The word resiliency has become the focus of countless discussions in the wake of 2021, but resilience is about more than simply mitigating risk after the fact. When we discuss resiliency at the point of design, we bring the discussion to the foundation of a product, considering the components across a BOM.

As the design evolves, considering factors like alternate suppliers or potential component options will allow risk mitigation from the beginning of a product’s inception and simultaneously prevent costly redesigns down the road for components that may become difficult or impossible to source.

2) Focus on Flexible Supplier Agreements

Supplier agreements must reflect the volatility of the real world. Agreements should take into account potential shortages, surpluses, and other changes in inventory. As a result, the agreement with your suppliers should allow for ramping up or down with the general forecast and immediate sourcing environment.

3) Broaden Your Intelligence and Insight

Perhaps the most pressing opportunity for manufacturers is the application of broad data, intelligence, and insight into the supply chain. Our own research shows that 70% of enterprises use their own data, but there’s a wealth of information beyond that which could help navigate shortages or mitigate other types of risk, while also capturing opportunities.

“The intersection of commodity market intelligence, supplier/supply/supply chain risk management and sourcing is a procurement maturity waypoint that very few companies have been able to navigate close to, let alone hit.”

                – Jason Busch, Founder of Azul Partners and Spend Matters 

Supplyframe’s design-to-source intelligence (DSI) solutions offer an avenue for automotive manufacturers to connect their organizations to widespread intelligence. Intelligence for risk mitigation, for resiliency at the point of design, and much more. While shortages are a reality, being unprepared for them is not. Learn more about the power of our DSI network today.

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Bradley Ramsey
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