[Global Focus] Semiconductor Shortage Peaks in May-June..."Car Production Halved"

How Long Will the Vehicle Semiconductor Supply Shortage Last?

[Asia Economy Reporter Yujin Cho] "The worst situation has not yet arrived."

Jim Farley, CEO of the American automaker Ford, recently made this forecast regarding the production cuts in the automotive industry during the announcement of the first quarter earnings. The vehicle semiconductor shortage, which became apparent at the beginning of the year, has been worsening, making large-scale production disruptions inevitable. CEO Farley predicted that the number of production disruptions this year will reach 1.1 million units, far exceeding the initially expected 200,000 to 400,000 units. He said, "The semiconductor shortage will most strongly impact production disruptions in the second quarter," adding, "As a result, production volume in the second quarter will be reduced by about half."

The situation at General Motors (GM) is not much different. GM currently has halted production of at least 80,000 vehicles due to semiconductor shortages. As a countermeasure, GM is focusing production on popular models such as Chevrolet, Silverado, GMC, and Sierra, but even this is facing supply difficulties. GM has ultimately decided to release vehicles without optional features that require semiconductors as an emergency measure. GM CEO Mary Barra said that although the semiconductor shortage situation is complex and fluid, "the worst impact will occur in this second quarter."

◇Removing options and shutting down... Survival struggle in the automotive industry = As Ford and GM warned, the vehicle semiconductor supply crisis is reaching its peak phase in May and June. As the semiconductor shortage prolongs, automakers are resorting to desperate measures by releasing vehicles without high-end optional features that require semiconductors. Nissan has released some vehicles excluding navigation systems, and Ram, a brand under Stellantis, recently excluded the intelligent blind-spot mirror function from 1,500 Ram 1500 pickup trucks produced. Renault has released vehicles without the large digital screen feature applied to the Arkana SUV.

For companies struggling even with these measures, they are repeatedly shutting down and cutting production. Ford recently decided to halt operations for two weeks this month at plants in Michigan, Illinois, and Missouri, and at the Cologne plant in Germany, about 35% of the 15,000 workers?approximately 5,000 employees?will have reduced working hours. Volkswagen plans to shut down its Mexico plant for two weeks until the 17th. In April, the shutdown risk spread to luxury car brands. German Daimler, which produces Mercedes-Benz, has put 18,500 employees on reduced working hours, and Jaguar Land Rover has temporarily suspended production lines at its Castle Bromwich and Halewood plants in the UK.

Renesas Electronics' Naka Plant in Ibaraki Prefecture, which was completely destroyed by fire on the 21st of last month (Photo source: Bloomberg)

◇Semiconductor shortage... How long will it last? = This crisis originated from supply-demand imbalance. Last year, at the beginning of the COVID-19 pandemic, most U.S. automakers kept low parts inventory fearing a drop in consumption, while demand for IT-related semiconductor products surged, leading semiconductor manufacturers to focus production capacity on IT products.

However, contrary to expectations, new car demand rebounded quickly. Meanwhile, in March, an unusual cold wave in Texas halted operations at a semiconductor plant in Austin, and on the 19th of last month, a fire occurred at Renesas, one of the top three vehicle semiconductor companies in Japan, further intensifying the supply chain crisis. The damage scale, initially expected to end soon at the beginning of the year, has been growing over time. Market research firm IHS Markit estimates that production disruptions at global automakers due to semiconductor shortages in the first quarter will reach 1.3 million units.

Opinions differ on when normalization will occur. The industry expects some relief in supply shortages in the second half of the year. Mark Liu, Chairman of TSMC, recently told CBS in an interview that by June, they expect to meet customer orders. Volkswagen brand CEO Ralf Brandst?tter said in a recent interview with German news agency dpa, "(The semiconductor supply situation) is still tight, but it is expected to ease somewhat in the second half of the year."

However, market experts commonly agree that full normalization is still far off. As demand for technology increases, the semiconductor shortage is spreading beyond vehicles to computers, home appliances, and other fields, while semiconductor manufacturing infrastructure remains severely insufficient. Building semiconductor manufacturing facilities (so-called fabs) requires billions of dollars in capital investment and more than two years of construction time. The prolonged crisis has also increased lead times (the time from order to delivery), which is another concern. According to the U.S. Semiconductor Industry Association, lead times have increased from the industry average of three months to seven months due to the worsening supply shortage.

The U.S. automotive media TTAC stated, "The normalization of chip manufacturers' supply is not proceeding as planned," and predicted, "The situation may not stabilize until the end of next year." Forbes also reported, "Due to continued high demand and supply constraints, the chip shortage may persist beyond next year into the following year."

Source: CNBC

◇Limitations of just-in-time production... "Supply chain model must change" = Foreign media point out that this crisis makes supply chain restructuring inevitable. Until now, global automakers have received parts almost simultaneously with orders to reduce inventory burdens. This 'just-in-time' production method, symbolic of the automotive industry for productivity improvement, revealed its flaws as the supply chain collapsed due to logistics disruptions caused by the COVID-19 pandemic, the Texas cold wave, and the Renesas fire in Japan.

Inside and outside the industry, there is a consensus that automakers and their parts suppliers need to increase inventory of key components compared to the past to reduce supply chain risks. Jean-Marc Chery, CEO of STMicroelectronics, said, "Chip manufacturers are not banks that can raise funds whenever they want," adding, "Automakers and parts suppliers must stockpile inventory to enable chip manufacturers to manage supply predictably and reduce supply chain risks." Reinhard Ploss, CEO of Infineon Europe, emphasized, "It is time for automakers to explore alternative supply options for semiconductor chips."

With increasing demand for advanced technologies and the paradigm shift to electric vehicles, the share of semiconductors in the automotive industry is expected to expand from the current 10% to 45% by 2030. Luke Junk, an analyst at Baird Securities in the U.S., said, "This crisis will be an important catalyst triggering a power struggle between automakers and semiconductor manufacturers over semiconductor prices, purchase volumes, and the cost burden of holding inventory for key components in the automotive supply chain."

This content was produced with the assistance of AI translation services.