Supply Chain Chaos... Auto Industry Rewriting Next Year's Business Plans

[Asia Economy Reporters Yujin Jo and Jehun Yoo] Hyundai Motor Group is struggling to hide its frustration amid the prolonged shortage of automotive semiconductors. In the first half of the year alone, Hyundai Motor Group experienced production disruptions of 70,000 units for Hyundai and 60,000 units for Kia. Although the group stated in a conference call last July that "the semiconductor shortage is expected to gradually improve from the third quarter," the repercussions continue.

In particular, the semiconductor shortage has intensified again since last month. In the previous month, the Ulsan 4 and Asan plants halted operations for 2 to 5 days, and overseas, Kia's Georgia plant and Hyundai's Alabama plant suspended production for 1 to 5 days. Hyundai Motor also decided not to conduct weekend overtime work this week.

Toyota manufacturing plant in Aichi Prefecture, Japan (Photo by The Washington Post)

◇ "The entire industry faces a survival crisis... No one knows when recovery will come" = As the semiconductor shortage has lasted longer than expected, the global automobile manufacturing industry has fallen into chaos. With inventory levels depleted, they face the challenge of resolving the immediate supply shortage while restructuring long-term supply chain models. They are seeking ways to manage supply volumes predictably from semiconductor chip manufacturers and to reduce supply chain risks by enabling inventory buildup.

Jim Farley, CEO of Ford Motor Company in the U.S., warned in an interview with The Wall Street Journal (WSJ) on the 30th of last month (local time) that "if semiconductor chips for the automotive industry are not produced, the entire industry will face a survival crisis."

As the supply chain crisis prolongs, a semiconductor supplier based in Chicago has reduced its supply volume for the first half of next year by about 20% compared to previous estimates, and a manufacturer supplying carpets and insulation materials to Japanese automakers said, "No one can predict when the crisis will recover."

Market research firm IHS Markit has lowered its global vehicle production forecast for next year due to supply bottlenecks in Asia, including Malaysia. Phil Armsrud, senior analyst at IHS Markit, said, "Due to the resurgence of COVID-19, the semiconductor shortage has worsened, and the lead time for semiconductor back-end processes (from order to delivery) has increased from a maximum of six months to nine months."

He pointed out, "Most companies responsible for semiconductor testing and packaging processes in Southeast Asia, such as Malaysia, operate on low-margin business models, making it difficult to make investments to expand facility capacity."

◇ Losses snowball... "Third-quarter earnings deterioration inevitable" = WSJ predicted that third-quarter earnings deterioration is inevitable due to the semiconductor supply shortage. General Motors (GM) is facing inevitable earnings deterioration in the third quarter due to reduced production of highly profitable pickup trucks. Last month alone, GM halted production lines for several weeks at five plants, including those in Indiana, USA, and Silao, Mexico. GM CEO Mary Barra said, "It looks like more time is needed to resolve the problem."

In Hyundai Motor's case, the third-quarter operating profit consensus among securities firms has recently dropped to 1.7869 trillion won, lower than the three-month average of 1.8003 trillion won.

Global consulting firm AlixPartners analyzed that losses for global automakers this year due to the semiconductor chip shortage will reach $210 billion (approximately 249 trillion won), which is double the forecast made in May.

Market experts believe that the semiconductor supply shortage will inevitably lead to a decline in vehicle production, resulting in a deterioration of third-quarter earnings. (Photo by WSJ)

◇ Stabilizing the supply shortage will take years = The biggest cause of the renewed intensification of the semiconductor shortage is the spread of the COVID-19 Delta variant. The Delta variant severely hit Southeast Asia, where global automotive semiconductor factories are concentrated, causing local semiconductor assembly lines to stop, which in turn has caused a chain reaction impacting automobile production lines.

Semiconductor chips produced by companies such as Infineon and TSMC are sent to Asian factories in Malaysia, Vietnam, and other locations for back-end processes (testing and packaging). However, as more factories have closed due to COVID-19, the shortage has worsened. The main supply route for engine control units (ECUs), currently the most severely affected, is also known to be Malaysia, where the Delta variant is spreading severely.

Industry insiders expect it will take several more years for the semiconductor shortage to stabilize. A representative from the domestic automaker industry said, "With the paradigm shift to electric vehicles and increasing demand for advanced technologies such as autonomous driving and connected cars, the semiconductor shortage will intensify further over the coming years."

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