Semiconductor crisis to continue as chip makers perceive auto industry as low margin

With the severe global shortage of semiconductor processing chips showing no signs of easing, the automotive and technology industries the world over will continue to be impacted well into 2022.

Poor supplies of semiconductors – a crucial component which silently power modern infotainment systems, driver aids and multiple electrical components – have been affecting companies for nearly a year now. The problem stems from the hugely increased demand for personal computers, tablets and smartphones at the height of the Covid-19 pandemic, which largely diverted supply away from the automotive sector. 

A passenger vehicle typically uses around 1,000 semiconductors and any slowdown in the supply chain means manufacturing operations can come to a grinding halt. Also, like many countries, India too has an over-reliance on the world’s biggest supplier of microprocessors – Taiwan.

Taiwan, the world’s semiconductor factory
The automotive industry primarily sources its semiconductor chips (microprocessors) from major global players such as NXP Semiconductor, Infineon, Intel, STMicro and Texas Instruments, with most of these chip manufacturers having “overdependence” on just one key producer – Taiwan Semiconductor Manufacturing Company (TSMC) – the world’s largest semiconductor foundry, located in Taiwan. TSMC is understood to have a manufacturing capacity of around 12 million microchips.

As per TSMC’s financial results, the percentage of its revenues coming from automotive is less than one-fifth. Clearly, from an end-supplier’s perspective, automotive is not its biggest market and the auto industry is also not its major buyer. Understandably, the margins in this domain would be low. 

According to Satish Sundaresan, Vice-President and MD, Elektrobit India – the automotive software arm of Tier 1 giant Continental, “The manufacturing cycle times in automotive are also quite different compared to other semiconductor-utilising industries, and the cycle time, for example, from silicon ingots to ECUs ranges in months and not a few weeks,” he explained.

“The lockdowns last year unfortunately meant that people weren’t buying cars, pushing auto companies to significantly revise their production plans,” Sundaresan remarked.

Consequently, with people stuck at homes, demand for consumer electronics like laptops, mobile phones as well as back-end Internet data centres went through the roof. “All chip manufacturers had to realign their existing stock (to other industries),” he added.

However, with lockdowns easing towards the second half of 2020 and with vehicle sales clinging on a V-shaped recovery curve, driven largely by the pent-up demand as well as increased need for safer personal transportation, the auto industry was caught unawares. Vehicle manufacturers in the UK, Germany and India faced hardships in maintaining production schedules due to the lack of semiconductor-based electronic components like ECUs, infotainment systems and sensors.

“So the moment the automotive industry’s outlook changed, it was not immediately acceptable to the chip manufacturers simply because in terms of the cycle times, we were talking about 4-6 months, which was not easy. And, this is the reason for the industry’s situation of where it is today,” said Sundaresan.

OEMs with Just in Time workflow take a hit
A little over a decade ago, during the financial crisis of 2008-09, the global automotive industry did learn its lesson to let chip manufacturers maintain reasonable amounts of inventories but barring exceptions like like Toyota, this wasn’t done soon  enough. “Therefore, even the biggest car manufacturers, who continue to rely on a just-in-time (JIT) concept, have not been able to source the chips during the pandemic,” said Sundaresan.

While some OEMs are believed to have managed alternative sourcing from semiconductor companies in Japan like Renesas and ROHM Semiconductor, which have their in-house foundries, those who kept waiting for the global supply chain to start functioning smoothly again, are the ones are now witnessing production slowdowns and even plant shutdowns.

According to Sundaresan, the situation has still not stabilised completely. While some OEMs in India are struggling, the second phase of state-wise lockdowns has somehow helped overcome this situation.

“We are not in a position where we could say that the worst is over (in terms of semiconductor supply), but we are coming to a point where we can certainly say that it is getting better and it is actually much better than what it was in January 2021. However, the problem still persists,” he concluded.  

Macro role of microprocessors
Semiconductors form an integral part of a modern-day automobile ranging from passenger cars to buses and even two-wheelers. From driving basic things like digital radio tuners, electronic power steering, and door-and-mirror controls to complex mechanisms such as LED lighting, telematics and V2X communication for ADAS functionalities, these microprocessors are at the core of the vehicle, increasingly transforming it into an electronic-intensive piece of engineering. As vehicles transform into computers on wheels, it is microprocessors and semiconductors that are enabling the transition.

Furthermore, with the growing adoption of electric mobility, these semiconductors are further going to enhance their contribution and become deeply integrated in the neural networks of a vehicle to drive a predominant set of functionalities of what are seemingly the vehicles of the future. 

Europe to support localised semiconductor production
According to LMC Automotive, the impact of global semiconductor shortages is expected to undermine European light vehicle production by almost 150,000 units in the opening quarter of 2021. Moving into Q2, further semiconductor supply shortages could see another 60,000 units output cut from European automakers’ plans.

Over the second half of the year, LMC says it expects the supply of semiconductors to normalise and for OEMs to recoup most of the lost volume by keeping plants operational through traditional summer shutdowns, if necessary. Even so, any major delays to the chip supply recovery beyond Q3 could result in a further 200,000 fewer vehicles being produced this year.

The situation has exposed a weakness in European supply chains that the EU plans to address by supporting localised semiconductor and processor production as an Important Project of Common European Interest (IPCEI), which, in turn, could lead to 50 billion euros (Rs 413,350 crore) of targeted investment.

Ambitious targets set by the EU to produce at least 20% of the world’s semiconductors in value by 2030 reaffirms this commitment. Importantly, it should improve semiconductor capacity and allocation, while allowing cost-conscious automotive manufacturers to keep lean inventories. The first boost to capacity will come from Bosch, a listed partner of the IPCEI group, which is set to start operation of a semiconductor and processor production facility in Dresden, Germany from the beginning of 2022.