Everything you need to know about the chip shortage that's plaguing automakers
They are a little bigger than a coin the size of a quarter, but tiny semiconductor chips are bringing production of vehicles across the nation to a halt.
Car dealers have barren parking lots, consumers face limited options on new vehicle purchases and buyers must wait, and wait, for their new ride to be built. Tens of thousands of new vehicles sit in parking lots awaiting semiconductor chips before they can be shipped to dealers.
Here's what you need to know about semiconductor chips:
So what are these chips?
The chips are tiny transistors made from silicon, which is found in most of the minerals on the earth's surface. They allow computers, smart phones, appliances and other electrical devices to function. Vehicles use chips, too.
Silicon feeds a $500 billion chip industry, according to a report by the BBC. The chips underpin a global tech economy worth an estimated $3 trillion, the report said. The raw materials for the semiconductor business often come from Japan and Mexico, with the chips made in Taiwan, China and some in the U.S.
What is the chip shortage?
The chip shortage is a result of the COVID-19 pandemic, which increased demand for the personal electronics such as cell phones and laptops that the chips are used in to the point where production could not keep pace with demand.
Why is there a chip shortage?
So in March 2020, the global pandemic prompted automakers, suppliers and car dealerships to close down. The economy went into a recession.
The automakers, who have experienced previous recessions, quickly canceled orders for parts with computer chips, thinking auto sales would nosedive, said Michelle Krebs, executive analyst for Autotrader.
Sales of new cars did plummet initially, but quickly rebounded with pent-up demand and 0% financing offers. Also, dealers figured out how to sell vehicles online, offering home pickup and delivery.
So when the factories restarted, the stronger-than-expected demand for new vehicles outpaced production and has yet to catch up.
"Automakers and suppliers that use chips contacted their chipmakers and put back their orders," Krebs said. "By then, chip capacity was consumed by other businesses — phones, computers, video games — as people worked and schooled at home."
Global chip production is monopolized by a few global, Asia-Pacific suppliers, said Joe McCabe, CEO of AutoForecast Solutions LLC.
"Everyone’s lights went off at the same time. This means that there was no ability to build inventory of products and solutions when businesses were able to turn their lights back on," McCabe said. "This created a significant bottleneck in all manufacturing processes."
The chip deficit was further complicated by a fire at plant owned by chipmaker Renesas Electronics in Japan. The damage was extensive and the plant is not yet up to full production, but they are hoping it will reach full production in June, Krebs said.
Why is there so much competition for chips?
In May, global consulting firm AlixPartners in Southfield said the chip shortages could cost the global auto industry $110 billion for the year.
GM CEO Mary Barra has said the shortage could cost GM up to $2 billion in lost earnings this year. Barra said GM expected chip supplies to return to normal in the second half of the year.
The Alliance for Auto Innovation, the trade group that represents automakers, said the shortage could hurt auto production for another six months and result in 1.28 million fewer vehicles being made in the U.S. this year.
So it is critical for automakers to get as many chips as possible to keep assembly lines moving to mitigate losses.
It remains unclear whether automakers might be able to make up that production and any revenue losses over time, Krebs said.
"The losses are being offset by higher vehicle prices and less expense," Krebs said. "Almost every automaker in every region has been forced to make production cuts. As a result, inventories are extremely low while consumer demand is extremely high. That means vehicle prices are high."
In the first week of June, the average listing price of a new vehicle was $40,566, up nearly $200 from the prior week. The average listing price was 5.5% above last year, and 10.3% above the same week in 2019, Krebs said.
Used car prices are also high because with new cars not moving, trade-ins aren't happening creating a shortage ofused cars. too. The average listing price for a used vehicle was $23,786, up nearly $340 from the prior week, Krebs said. Prices are running 22% above 2020 and 2019 levels, she said.
Why is my vehicle delayed because of chips?
Many automakers have idled factories and stopped making some vehicles altogether so as to ship whatever chips they can get to more in-demand highly profitable vehicles such as pickups and SUVs. Also, GM and Ford Motor Co. are building the vehicles without the chips, then parking them to await the part. Once the chips arrive, those vehicles are put through final assembly and shipped to dealers. But the delay can be weeks.
In the meantime, supply of new vehicles is at an all-time low, Krebs said. Used supply is slowly rising due to a slowing sales pace. These trends likely will continue over the coming weeks since there is little that could change the current situation, Krebs said.
What sorts of things are chips used for in vehicles?
Cars use the chips in a variety of electronics systems. One car part could use 500 to 1,500 chips depending on the complexity of the part.
How long will the chip shortage last?
Cisco CEO Chuck Robbins told the BBC in late April: "We think we've got another six months to get through the short term. The providers are building out more capacity. And that'll get better and better over the next 12 to 18 months."
How are the automakers adjusting, or not adjusting?
In the short term, automakers have been cutting the production of vehicles like cars that are not as much in demand and not as profitable as pickups and SUVs, so as to redirect chips from cars into the money-making vehicles.
They also are building vehicles and parking them until chips become available.
Long term, automakers are examining their supply chains. The just-in-time-inventory system that they took from Toyota may be revamped some with critical parts like chips, Krebs said.
The chipmakers are trying to boost production and are looking at – and some committing to – building more capacity, including in the U.S.
The Biden administration has also assigned a task force to study the chips' supply chain. The U.S. Senate has voted 68-32 in favor of legislation intended to battle back against overseas competition, especially a growing threat from China, including investing more than $50 billion into the making of semiconductors.
Looking forward, automakers, suppliers and government officials are looking at EVs and where batteries and other parts come from as they push for North American production.
"The chip shortage demonstrated our exposure to a limited domestic production capacity to the point where it has turned into an issue of national security," McCabe said. "Each major global market is now getting full support from their governments for a combination of domestic and redundant supply streams. Expect to see many new, smaller chip producers, scale up to help mitigate the issue in the future — with government money supporting the efforts."
McCabe said carmakers are likely to become more vertically integrated in chip production, taking direct responsibility for multi-year, high-volume contracts to make sure there are no future capacity constraints. Volkswagen has already indicated this direction.
As most carmakers including Ford and GM move toward electric vehicles, the need for high volume, and more complex chips will help shape the global chip manufacturing landscape, McCabe said.