Overhaul Supply Chain to Avoid Next Catastrophic Shortage

From the industry’s manufacturing hubs in Germany to those in Japan and the U.S., automakers are grappling with a semiconductor shortage that analysts at Fitch Solutions predict could stretch into 2023.

In part, the problem is the consequence of an otherwise positive development for the industry: Following a pandemic-driven recession, vehicle demand is bouncing back, and industry experts expect a year of strong sales growth in 2021.

That’s the good news.

The bad news? Last year, when the industry foresaw a prolonged sales slump, automakers issued fewer orders for semiconductor chips, while other industries ramped up orders as people throughout the globe turned to digital devices and technology to work, learn, shop and socialize amid COVID-19 lockdowns and stay-at-home orders.

Now, with the economy recovering and consumer demand picking up, the supply of semiconductor chips simply can’t keep up with demand from the auto industry. Several factory accidents and power failures have further exacerbated the shortage.

Due to the global shortage, governments are proposing new methods and resources to encourage companies to ramp up semiconductor production in their own countries, with an eye toward alleviating dependence on Asia.

In the U.S., a recently proposed $2 trillion infrastructure plan would allocate $50 billion for chip incentives, research and design to help mitigate risks and increase productivity. In Germany, Bosch, with financial support from the local and federal government, is opening a factory specifically built for automotive chips to help enhance the electric vehicle market.

Unless governments take immediate action, the impacts won’t just be felt down the road; they will continue to worsen.

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Even if Fitch’s warnings of a multiyear shortage don’t pan out, the industry’s current challenges should serve as a wake-up call.

Amid fast-evolving consumer expectations, the automotive industry finds itself in the midst of a profound paradigm shift. As manufacturers integrate a diverse array of new connected features – including more sophisticated information and navigation systems, and even entertainment options such as in-car gaming and shopping – the automobile is being reimagined as an immersive, media-rich experience.

Semiconductor chips will power that experience. But without a fundamental rethinking of the automotive supply chain, the industry soon enough may find itself once again where it is now: Scrambling to come up with patchwork solutions – all of which come at costs to consumers and the manufacturers themselves – to a mismatch between the demand for and supply of chips.

But this time, the writing will have been on the wall for far longer, which is why now is the time for a modernized supply chain that meets the needs of 21^st-century automakers.

What will this look like in practice? The traditional automotive supply chain has barely evolved in decades – in contrast to vehicles themselves, which have undergone major cosmetic and technological changes. But an entirely new tier of flexible, cybertech suppliers is needed to mitigate future challenges likely to face the automotive supply chain.

First, such suppliers are able to build more adaptable solutions which do not depend on a single chip model and easily can switch between various compatible models during production. We have seen this approach widely used in the smartphone industry, but not so much in automotive, where barriers remain high.

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While this may lead to vehicles lacking some ECUs, they still will have the necessary features to perform as intended. More importantly, production will not be halted. This method, which we have seen successfully used in the aviation field, can and should be applied to automotive.

If every crisis involves both danger and opportunity, then it should be abundantly clear where the opportunity in the semiconductor crisis exists: in the move toward a supply chain that actually makes sense for 2021.

Dionis Teshler (pictured above, left) is CTO of GuardKnox, a technology and engineering company specializing in e/e products and solutions for the automotive market.