Ongoing shortfalls in supplies of tiny but critical semiconductors have crippled automotive manufacturing capabilities over the last two years. The broader microchip shortage severely constrains production of new vehicles while raising prices for consumers. Understanding this crisis requires examining the outsized role of chips in cars and complex global supply chain vulnerabilities.
Outsized Role of Chips in Cars
Modern automobiles now contain thousands of semiconductor chips embedded in practically every electronic component. They enable fundamental functionality – without enough chips, partially built cars stack up incomplete.
Steadily Increasing Needs
Over the last 20 years, semiconductors became essential for safety systems like airbags, fuel injection controls, assisted driving features, and touch screen displays. A typical new car requires 3000 chips from the engine to brakes to entertainment systems.
Cost Headaches
At the same time, shortages made chip suppliers reduce discounts and charge higher prices, creating thorny cost control issues for automakers. Finding alternative chip supply has proven extremely challenging.
How The Shortage Emerged
The intricate causes behind the historic demand-supply imbalance reveal systemic risks of concentrated production. But the crisis emerged most directly from unforeseen ripples of the COVID-19 pandemic.
Soaring Demand
Lockdowns fueled a surge in consumer electronics purchases, pulling chips towards producing laptops, tablets and gaming devices. Simultaneously, automakers cut chip orders anticipating plummeting car sales which never fully materialized.
Production Inflexibility
Caught unprepared, major Asian semiconductor foundries could not quickly retool optimized production lines dedicated to smartphone and computer processors to also make specialized auto-grade chips.
Knock-on Effects
As auto manufacturers came to dominate the shrinking inventory of available chips, makers of other electronically intensive products soon faced their own shortages, creating scarcity spirals.
Automotive Impacts
With average vehicles becoming chip-centric computers on wheels, the shortage cripples automakers reliant on just-in-time deliveries who have few alternatives to fulfill obligations.
Millions of Cars Not Produced
Research firm AlixPartners estimates 7.7 million fewer vehicles were manufactured globally during 2021 due to semiconductor supply issues – with another potential loss of over 5 million this year.
Inventory Shortages
New and used car dealership lots look deserted in many areas. Customers face long wait times up to a year on orders unless willing to pay hefty markups for what remains in stock.
Shuttered Factories
Many major automakers including GM, Ford and Toyota resorted to temporarily closing plants until sufficient chips arrive to finish assembly. Tens of thousands of US auto workers got furloughed during these shutdowns.
Comparison With Prior Supply Chain Disruptions
While the scale of the microchip shortage crisis feels epic, manufacturers endured major production chain breakdowns as recently as 2011 following disasters and geopolitics.
Japan Earthquake Aftermath
A tsunami following the devastating 2011 Great East Japan earthquake and nuclear meltdown hampered exports of specialty auto electronics and sensors for months from partner facilities.
US-China Trade War Tariffs
America and China imposed waves of punishing reciprocal import taxes starting 2018 on goods including machinery and electronics. But chip supplies avoided direct impact compared to raw materials shortages today.
Broader Economic Implications
Beyond hobbling carmakers, semiconductor scarcity also threatens rising prices and twisted impacts on inflation across interconnected economies.
Fueling Inflation
New car prices jumped over 10% on average last year – used vehicles soared 40% higher. Overall consumer price inflation seesaws up dramatically any month pricier cars dominate Bureau of Labor Statistics market baskets.
Exacerbating Supply Chain Woes
Hoarding and demand uncertainty from chip shortages foster over-ordering and cost increases for components involving semiconductors. Hundreds of products have production reverberations from farm equipment to game consoles to home appliances.
Projected Recovery and Adaptations
Industry leaders expect rehabilitation from the microchip drought remains a prolonged process requiring targeted investment and strategic adjustments.
Years to Rebalance
Given long production planning horizons, semiconductor makers do not anticipate supply stabilizing cost until late 2023. And full rebalancing supply to auto sector demand could take at least 3-4 more years.
Post-Pandemic Uncertainty
Demand forecasting faces unpredictability whether the remote economy persists. Plus potential Covid waves or geopolitical conflict in Asia might continue disrupting manufacturing.
In response, many automakers now plan to stockpile extra chip inventory as a buffer once supply normalizes. Prioritizing semiconductor orders over other components is also essential.
Pursuing Long Term Solutions
Retooling inefficient aspects of the automotive semiconductor supply chain is vital to mitigate future crises. This requires global coordination across automakers, government policies, and producers.
Diversifying Suppliers
Auto manufacturers look to reduce reliance on a handful of Asian chipmaking giants. Emerging options include “chiplet” modular designs that can reconfigure processors and regional foundries ramping up in the US and Europe.
Reshoring Production
Western governments want to reshore more semiconductor fabrication plants domestically to hedge risks of offshore dependency. But major investments in facilities and technical education are prerequisites.
Inventory Buffers
Stockpiling extra supplies would help absorb unexpected supply chain shocks. But holding adequate safety buffers requires alignment given chips have a shelf life and consume working capital.
Over $400 billion gets spent on automotive semiconductors annually now so all entities have incentives to prevent repetitive crises. But solutions rely on coordination across the industry at an unprecedented scale.