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Updated August 11, 2022
Supply chain issues are widespread and prevalent, with the ongoing chip shortage causing reverberations across many sectors. Among those most affected is the auto industry, where chip shortages are holding up production and denting sales.
Semiconductors or chips are a crucial element in the manufacturing of consumer electronics such as smartphones, cameras and computers. In cars, they are needed for everything from entertainment systems to power steering. For the auto industry, the supply crunch and shortage of chips has forced car manufacturers to cut production and delivery targets and has led to a number of profit warnings.
In this supply chain spotlight, J.P. Morgan Research explores how the current chip shortage is impacting automakers, the “perfect storm” that is causing it and what the path forward might look like for the auto and auto parts industries.
Why Is There a Chip Shortage?
In the simplest terms, the current chip shortage is due to strong demand and no supply. This goes back to COVID-19 lockdowns in the second quarter of 2020, when demand for work-from-home technology increased exponentially and automakers found themselves competing for the semiconductor capacity located in Asian foundries.
Adding to the problem, downstream operations in South Asia were adversely impacted by the COVID-19 Delta variant, creating further bottlenecks in the supply chain. Malaysia in particular performs many “back-end” operations such as chip packaging and testing, which is more labor intensive than wafer fabrication processes, so activity is more easily affected by public health measures.
At the beginning of the pandemic, car companies cancelled orders, but as production ramped up again towards the end of 2020, there was no semiconductor supply available. This was compounded by demand increases, particularly at the higher end of the autos market, as low interest rates were aiding affordability.
While the COVID-19 pandemic was the initial catalyst for the chip shortage, structural factors are also part of the picture. The auto industry is changing, with a major shift towards automation and electric vehicles. These require yet more chips, causing further strain on an already stretched industry.
When Will the Chip Shortage End?
More chips will become available in the second half of 2022 and the shortage is nearing the end according to J.P. Morgan Research. However, available chips may not be the right type to satisfy all demand. Volkswagen believes that semiconductor supply is unlikely to meet auto industry demand until 2024.
Sandeep Deshpande, Head of European Technology Research, J.P. Morgan
Currently, capacity is being freed up due to weakness in some end markets, particularly PCs, smartphones and consumer electronics, where sales have been falling since March 2022. Foundries in Taiwan are beginning to reallocate some of this capacity to the automobile and industrial end markets, which lost out to other sectors during the COVID-19 pandemic. However, autos generally require older chips, which are fundamentally different to those used in PCs and smartphones.
“We’re going to get a lot more semiconductor capacity in the second half of 2022 – we’re nearing the end of the supply crunch” said Sandeep Deshpande, Head of European Technology Research. “However, capacity still needs to be qualified for use in the automotive industry. Can the right matching occur between available supply and correct qualification? This is the difficulty that remains. If there wasn’t this issue, I would be of the opinion that things could be normal by the end of the year.”
The Semiconductor Shortage and its Impact on Auto Supply Chains
Jose Asumendi, Head of European Automotive Research, J.P. Morgan
2022 has so far been marked by production disruptions across many fronts. In addition to existing semiconductor shortages, the Russia-Ukraine conflict and COVID-19 outbreaks in China have affected global supply chains and auto production.
“The U.S. market, like other regions, has been characterized by robust pricing power across original equipment manufacturers (OEMs),” said Jose Asumendi, Head of European Automotive Research at J.P. Morgan. “This has been underpinned by low inventory levels, strong underlying demand and tight supply of semiconductors due to strained supply chains.”
In June 2022, the U.S. seasonally adjusted annual rate (SAAR) for light vehicle sales came in at 13.22 million, which was up 3% month-over-month but down 14% year-over-year, reflecting the industry’s difficulties. Industry volumes were lower for the 11th consecutive month, down 12% year-over-year. However, volumes were up 2.6% month-over-month.
On the demand side, incentives have fallen to the lowest levels since January 2013. This is indicative of high consumer demand in the auto end market, as retailers do not need to offer cash incentives to attract consumers.
Can the Auto Industry Overcome the Chip Shortage?
The second half of 2022 will start to reflect supply chain recovery according to J.P. Morgan Research. Global car production is forecasted to be up 7% in the 2023 fiscal year, with sequential improvements expected from the second half of 2022 as the chip shortage gradually improves.
Global light vehicle production is returning to pre-pandemic levels
Global light vehicle production tumbled in FY20 at the onset of the COVID-19 pandemic. Sequential improvement is expected in the second half of 2022 and production is predicted to keep rising through to FY25.
“We are noticing that major OEMs are expanding production across plants,” said Asumendi, with car makers announcing plans to hire more staff and invest more in their manufacturing facilities. Stellantis Vigo plans to hire more than 1,400 workers to activate two new shifts this fall. The company also announced it will produce the latest Fiat Doblo in Spain and is expanding production in its Spanish plants. Volkswagen is increasing production in Germany and has invested 1 billion euros ($1.03 billion) in converting its plant in Emden to manufacture electric cars. Output is also expected to increase at its electric vehicle (EV) factory in Zwickau after production was interrupted when Russia invaded Ukraine.
The long-term outlook for the sector is positive according to Asumendi. “We are starting to see meaningful signals of production stabilization in Europe as well as improvement signals in China,” he added.
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