Automakers are having to slash production due to a shortage of semiconductors. Semiconductors are silicon chips that perform control and memory functions in products ranging from computers and cellphones to vehicles and microwave ovens. Ford, for example, is slashing auto production up to 20 percent for the first quarter of this year. It cut production of its F-150 pickup truck—the nation’s top-selling vehicle and the company’s biggest moneymaker—and several sport-utility vehicles, including the Explorer because of the shortage. Losses of vehicle production globally in the first and second quarters could reduce Ford’s pretax bottom line this year by $1 billion to $2.5 billion. General Motors Co. expanded the downtime at plants in Kansas, Canada, and Mexico to mid-March, citing the chip shortage, and said it expected lost production from the shortage to erode its bottom line by $1.5 billion to $2 billion this year. GM had stayed ahead of the shortage for a few months by asking its suppliers before the holidays to stockpile chips.

Most major auto makers have been forced to curtail at least some factory output and makers of consumer electronics have had to deal with limited supplies for their devices. The shortages are a result of the coronavirus shutdowns last spring when manufacturers had to close shop and the increased demand resulting from consumers increasing their use of technology during the pandemic. As demand for laptops, gaming systems and other personal-electronics surged during the pandemic, orders for semiconductors soared. Working remotely also resulted in a boom in computing services, which is straining chip availability and leading to higher prices. The shortages of chips are expected to last into 2021, because it can take semiconductor makers six to nine months to realign production.

Auto Industry and Semiconductors

During the past decade, carmakers have become increasingly dependent on electronics to boost the appeal of their products, adding features such as touch screens, computerized engine controls and transmissions, built-in cellular and Wi-Fi connections, and collision avoidance systems that use cameras and other sensors. New cars can have more than a hundred semiconductors, and the lack of a single component can delay production or cause shutdowns at manufacturing plants. Also, the industry’s transition to electric vehicles and the advent of self-driving features is increasing the need for more software-based systems.

Auto manufacturers have spent decades streamlining their supply chains, reducing their costs by carrying little inventory and relying on suppliers to deliver components “just in time.” Some car makers blame the shortage on parts suppliers, which generally do most of the chip buying—they build the chips into the parts they sell car makers.

The auto industry bought about $43 billion of chips in 2019, roughly a tenth of the global semiconductor market that year. Taiwan Semiconductor Manufacturing Co., the world’s largest contract semiconductor maker by sales, is the largest single producer of the microcontrollers at the heart of the car industry’s supply shortage. The company reported record fourth-quarter revenue in its latest earnings report with the car industry accounting for 3 percent of its quarterly revenue—dwarfed by customers such as Apple Inc. and smartphone-chip company Qualcomm Inc. New 5G iPhones have been taking up a large chunk of its capacity. The company indicates it is working with customers to address the shortage of automotive chips. Attention has been focused on Taiwan’s importance as a chip maker for the world in light of growing Chinese aggression in the region and China’s long-held dream to reclaim Taiwan.

IHS Markit, a research firm, expects the chip shortage to reduce car industry production by about 672,000 vehicles globally in the first quarter, with problems lingering into the fall. Auto makers, citing the shortage, have furloughed tens of thousands of workers.

Chip Manufacturers

When Covid-19 hit, automakers slashed orders for chips in anticipation of plunging sales, forcing semiconductor makers to shift their production lines to meet surging orders for chips used in laptop computers, webcams, tablets and 5G smartphones. Chipmakers favor consumer-electronics customers because their orders are larger than those of automakers—the annual smartphone market is over 1 billion devices, compared with fewer than 100 million cars. Auto-making is also a lower-margin business, leaving manufacturers unwilling to bid up chip prices as they avoid risking their profitability. While the newest cars require more chips, so do the latest consumer electronics. Smartphones using so-called 5G connectivity require 40 percent more semiconductors than older 4G versions.

Because of pressure on chip makers to control production costs, semiconductor companies that supply the auto industry, such as Infineon, NXP Semiconductors and Renesas, had most of their advanced chips made for them by external manufacturing services, called foundries. They continued to make the simpler auto chips in their own factories, frequently fabricating them on eight-inch silicon wafers rather than the 12-inch discs used in more modern plants. Besides the shortage problem, another problem arose in that the manufacturers using the older eight-inch wafers were not able to increase production much because they had not invested in new equipment and that equipment is now difficult to obtain because the technology is older. A significant percentage of automotive, 5G, and self-driving silicon is built on the older wafers. Instead of drying up as was originally expected, their demand has actually increased in recent years.

Modern factories and foundries have spent decades emphasizing lean, just-in-time manufacturing, and the result has been a supply chain that is not well-suited to absorbing sudden surges in demand. Part of the problem with building resiliency into the semiconductor manufacturing chain is that foundries typically have high fixed costs, due to the need to keep the plant in peak operating condition whether manufacturing is taking place in the facility or not. There have been reports that the production delays hitting most high-end consumer equipment are being caused by a shortage in Ajinmoto Build-up Film (ABF), a resin used in producing microprocessors.

Manufacturers using the new chip are increasing production capacity. Infineon, based in Munich, is stepping up investment in new production capacity in 2021 to as much as 1.5 billion euros ($1.8 billion) from 1.1 billion euros in 2020. The company is also ramping up production at a new chip factory in Villach, Austria, that will produce 12-inch wafers. Computer chips are very complicated to manufacture; the fabrication plants where they are made can cost tens of billions of dollars to build.

In November, NXP Semiconductors NV, a major chip supplier to the auto industry, indicated there was a severe shortage and prices would increase. Other chip makers have also experienced backlogs and long lead times—some of which are extending to 40 weeks or more. The lead times for chips used in the auto sector typically runs about 26 weeks.

The global semiconductor market is expected to be worth about $129 billion in 2025, nearly triple its size in 2019, according to the research firm Mordor Intelligence.


Semiconductor shortages are hampering the automobile manufacturing industry. Auto companies are temporarily closing their factories due to a lack of chips. Some believe the shortage could last until next year. The semiconductor industry receives more revenue from the electronics industry than the auto industry and have been focusing its attention there. Electric vehicle production will only exacerbate the problem, and Taiwan’s predominance in the global market has focused attention on the growing Chinese ambition in the area.

Print Friendly, PDF & Email