Why is the automotive industry struggling to source semiconductors, are there any short-term solutions, and what long-term measures can prevent another semiconductor shortage?
The Engineer put these questions to a range of experts for answers and potential solutions.
Meet the experts:
Ian Nethercot, MCIPS, supply chain director, Probrand
Sarah Riding, partner at Gowling
Matthew Walters, head of Consultancy Services at LeasePlan UK
Scott White, CEO at PragmatIC Semiconductor
Simon Beresford-Wylie, CEO at Imagination Technologies
Why is there a shortage of semiconductors and what impact is it having?
SR: Surging demand and disrupted supply has led to a severe chip shortage. Supply was diverted away from the automotive sector to the technology sector by the boom in demand for personal electronic devices during the Covid pandemic and with tech companies paying more for semiconductors, available supplies went there first. This has been exacerbated by other situations including the drought in Taiwan affecting manufacturers. This volatility is impacting production schedules and ability to meet global demand for vehicles. A rush on semiconductors following lockdown was faster than expected and the chipmakers have not been able to scale up quickly enough to meet demand.
MW: Demand for semiconductor-reliant technology is increasing, but supply is struggling to keep up. There are no quick fixes, the SIA claims up to a 26-week lead time for semiconductor factories to deliver the orders to customers.
What does the situation say about automotive supply chains?
SR: Car manufacturers have been looking to overhaul their component supply chains and work with suppliers to try and maintain production, but this has come a little late in the day to reverse the situation. Ford for example states that it could lose 50 per cent of planned production in quarter two of 2021 with experts predicting delays across automotive extending into 2022. The surge in demand post lockdown was not foreseen and better planning should have taken place. Covid has heightened attention to supply chain vulnerabilities and organisations should be focussing on improving supply chain and removing vulnerability to give them competitive advantage.
What can the automotive industry do in the short-term about the semiconductor shortage?
SR: For the immediate situation there are no quick fixes to the lack of planning. Many automotive manufacturers are focussing on production schedules – some are bringing forward the usual summer shut down periods in the hope that suppliers will improve stocks in that period, others are moving to a more limited production basis. Flexing the production schedules in these ways will help mitigate to some extent but it will not stop the interruption. Chip manufacturers claim that automotive customers did not plan for demand enough in advance and with 3–6-month lead times the supply chain is under significant stress. A long-term solution may well be for manufacturers to look to build in-house technology and capability to produce such a critical component. The demand for semiconductor technology will only increase so being bold about investment may help manufacturers face a less volatile and less risky long-term outlook.
IN: The reality is there are no quick fixes and very limited actions anyone can take to improve this situation. My best suggestion for the short-term is to look at broadening approved suppliers for chips and components on a global scale. Clearly this is a high-risk category, and that risk needs to be spread out across multiple suppliers. There is huge investment in production plants happening all around the world, so it is worth considering that procurement departments may need to cast a wider net and look further afield.
MW: The semiconductor shortage will undoubtedly cause widespread disruption within the automotive industry. At best, it could cause some trim levels or optional equipment to become unavailable; at worst it could stall production of an entire model line. It’s a particular challenge for an industry which tends not to hold much inventory.
SW: Longer term, the industry should be actively developing models that support tighter integration of semiconductor manufacturing into critical supply chains.
In what ways can other nations learn from the US, which is attempting to regain its presence in semiconductor manufacturing?
SW: Due to high capital investment and relatively long lead times, supporting domestic semiconductor manufacturing requires clear and unambiguous incentives to allow planning certainty. These should be structured as simply as possible, to be fair and accessible to all players in the industry. There must also be an acceptance of the globally interconnected nature of the semiconductor supply chain, which needs clarity and predictability regarding international trade arrangements.
S B-W: There is a role for governments across the world to play in making semiconductor supply chains more resilient. Their efforts should focus on diversification, to improve the current situation whereby chip production is concentrated in a small number of locations – making supplies more vulnerable to bottlenecks and local disruption. To promote supply chain diversification, governments should provide incentives for increased local chip production while fully remaining committed to global supply chains. In other words, increased manufacturing at home should be seen as a means of supplementing, not displacing, imports from abroad. This is already underway in Europe, with the EU setting a target of producing 20 per cent of the world’s semiconductors – as opposed to its current 10 per cent market share – and is finalising plans to launch a government-industry alliance to achieve this. In the US, the Biden administration has ordered a full review of critical supply chains, including semiconductors, and is seeking to boost domestic chip manufacturing. The UK should consider doing the same as it sketches out its post-Brexit, post-pandemic future. It possesses many of the ingredients needed to successfully manufacture chips, from cutting-edge semiconductor companies and a highly developed technology industry to well-established strengths in advanced manufacturing. But an overarching vision from government is needed if the pieces are to fall into place.
Should the onus be on manufacturers to expand facilities closer to key markets (such as TSMC in Arizona) as demand for semiconductors grows?
SW: Ideally yes, but with conventional semiconductor manufacturing this will always be challenging due to the extremely high levels of capital investment and specialised personnel required. This may be unavoidable with cutting edge technology nodes, but where more modest functionality or performance is acceptable, there is scope for a more creative approach – for example, PragmatIC’s “fab-in-a-box” model, which reduces capital requirement by 100x and can be operated on customer sites with only a handful of local staff.