Analysis: Chips are down for car makers as shortage continues

Some chips are simpler than others, and automotive ECU makers such as Bosch and Denso can manufacture these in-house. However, the more complex units – called microcontrollers or, sometimes, system-on-chip – cram significantly more computing capability into an incredibly small package to power advanced technology including infotainment systems and semi-autonomous driving functions, and making them is far harder. So hard, in fact, that IHS Markit estimates 70% of all automotive microcontrollers are outsourced to just one supplier, TSMC in Taiwan.

However, just 3% of TSMC’s revenue comes from the automotive sector, according to IHS Markit. This means that, unlike traditional automotive suppliers, it has little reason to adjust its business plan to accommodate the industry’s demands.

The problem is now being discussed at an inter-governmental level. German economy minister Peter Altmaier recently wrote to his counterpart in Taiwan, Wang Mei-hua, to ask for help, and TSMC has said it will put aside more chips for car makers. But as with the Japanese nuclear disaster and the flooding of Thailand in 2011, the crisis has exposed how dependent car makers are on single-sourced components. “It has highlighted the fragility of the ecosystem,” IHS Markit wrote.

The problem for car makers is that they don’t often know where a part comes from if it’s contained in another part, as chips are. They have visibility of their so-called Tier One suppliers, but not necessarily the suppliers below that.

Some car makers are trying to change that. Jaguar Land Rover, for example, drilled down through its supplier tiers to find out who was supplying its chips, and then contacted the chip makers directly to plea for supply. It worked, CEO Thierry Bolloré said on a recent investor call, claiming the company was currently not affected by the shortage. JLR’s status as a relative minnow compared with, say, a mobile phone giant helped. “We are so small compared to other actors that in fact our allocation doesn’t change the picture for the other customers,” he said.

Competition for supply is only going to get stronger, so making sure there’s not a repeat of this winter’s crisis won’t be easy.

Markus Duesmann, Audi CEO and head of R&D at Volkswagen, called for Europe to boost its chip-making supply and reduce the region’s reliance on Asia, possibly by funding companies in the same way the European Union funds battery cell technology.

The EU has reportedly begun the process of building a fabrication plant for the most sophisticated chips, potentially in collaboration with TSMC and/ or Samsung Electronics. Until its completion, car makers could choose to move from a just-in-time supply model to stockpiling when chips become available again, something that Mercedes-Benz in particular has said it is looking into.

Ironically, if there was ever a good time for a chip shortage, at least in Europe, it is now, when customers in key markets, including the UK and Germany, face restrictions when buying cars from dealers. Ford’s pausing of Focus production in Saarlouis, Germany, for a month is officially because of disruption in chip supply, but the underlying lack of demand because of the lockdown was also a driver. It is not something that is particularly bothering dealers, according to Robert Forrester, CEO of Vertu Motors. “The semiconductor shortage is not the biggest issue in the world right now,” he said. Many retailers view the reopening of showrooms as far more critical.

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