Automakers will lose $110 billion dollars in revenue in 2021 because of the chip shortage. What solution could offset these losses in the long run?
Episode Summary:
Global automakers will cumulatively lose $110 billion as a result of a worldwide shortage of integrated circuits. Auto manufacturing has evolved into a global, just-in-time enterprise with extended and complex supply chains. Very vulnerable to external shocks. Covid 19 was the biggest shock imaginable, and now automakers are struggling to source critical components at a time when demand is roaring back post pandemic. Could this issue have been avoided? Jim Anderton thinks so and explains one way how.
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Transcript of this week’s show:
If you’ve ordered a new car or light truck to celebrate the passing of the Covid 19 pandemic, congratulations. If you’re lucky, you’ll get it soon. Many buyers will not, as their cars are either not being built or sitting in storage lots awaiting the critical integrated circuits they need to operate. There is a global chip shortage, and despite the usual Monday morning quarterbacks that pop up on MSNBC or Bloomberg, no one saw this one coming. Put simply, when Covid hit, auto sales tanked, but personal electronics sales skyrocketed as people adjusted to working remotely, and in isolation relied more on personal electronics for contact and entertainment. The semiconductor industry responded, switching manufacturing capability to consumer electronics. While auto demand is back, so is the demand for chips, except they are simply not available. Why? A major reason is that it’s incredibly expensive to switch integrated circuit manufacturing processes from one type to another, especially if it involves a change in the fundamental technology. If the automaker doesn’t need leading edge 5nm IC, that doesn’t mean that the industry can flip a switch and start 7 nm production again. For the auto industry, this has ripped the wallpaper off the just-in-time manufacturing system exposed the old paint underneath. Some manufacturers, notably Toyota, have been carrying unexpectedly high inventories of ICs and can weather the shortages well. Other manufacturers, like Ford are assembling incomplete vehicles and storing them awaiting the ICs. Even lower volume manufacturers like Tesla are affected. So in essence we have a fragile, critical and global supply chain with lots of inertia and very high startup costs, basically a dry forest looking for a spark. It’s easy to point fingers after the fact, but more than one industry expert has questioned whether the risk to production caused by heavily decentralized manufacturing really saves money in the long run. Others argue that it simply not decentralized enough, and that a truly diverse manufacturing base would, like the Internet, be resistant to overall system disruption. I think the major part of the problem is a serious lack of standardization in the auto industry. Fuels, lubricants and basic fastener sizes were standardized years ago, as were essentials like metals compositions and things like O-rings, gasket materials and lamps. Given the relative simplicity of most automotive control functions, particularly in body control modules compared to things like video games, it’s difficult to believe that a global automotive industry working group couldn’t establish a standardized chipset for driving most automotive functions, using previous generation technology, like 7 nm, which is widely available. Individual manufacturers could still write their own code to differentiate their product, but it’s difficult to understand why basic control modules can’t be as interchangeable as the fuses that protect them. The chip shortage may cost the automotive industry worldwide $110 billion in lost revenue. With consolidation, there are fewer, bigger manufacturers now. Maybe it’s time for some engineering VPs to get together over a cold one asked themselves why everyone needs a different kind of shovel to dig the same hole.
