The Past, Present and Future of Automotive Semiconductor Shortages

Shortages and supply constraints are nothing new for the electronics supply chain, but for the automotive leader, 2020 has been a series of events, product planning challenges, dynamics of multi-layered supply chains, and geopolitical factors , have led to what many call a “perfect storm” — a storm that has plunged us deep into the quagmire of a global semiconductor shortage that will continue into the second half of 2021.

How to understand what’s going on? What can we learn for the future? After all, cars are becoming more complex, and with the advent of self-driving cars, this complexity will only increase the demand for semiconductor content and critical Electronic components in new vehicle designs. We can analyze the past, present and future of automotive electronics and how the industry will need to change to prevent or alleviate shortages.

The roots of the current situation can be traced back to just-in-time production (JIT) in 1970. JIT was originally a management philosophy focused on making products on demand, but has now shifted to minimizing waste in the manufacturing process.

This concept has been developed and perfected in Toyota’s Japanese manufacturing plants, and over the past few decades it has become the dominant production mode for the entire automotive industry. The problem with this approach, of course, is that its stability depends on having a consistent and reliable source of supply.

The automotive industry’s influence on typical components in its supply chain has allowed them to last like this for decades with little to no inventory and a focus on ongoing cost-effectiveness. However, new challenges arise when this supply chain model extends to more flexible electronic goods and standard integrated circuits, which have a wider customer base including consumer electronics giants and smartphone makers.

Parallel industries such as communications and the 5G value chain have important indirect impacts on both the continuity of supply and cost drivers of these common commodities. Notably, geopolitical tensions and recent changes in trade agreements have been a source of recent uncertainty and disruption.

That said, retaliatory tariffs between the U.S. and China are shifting under the Trump administration, with specific restrictions on trade with specific companies like Huawei. The situation remains unresolved with the inauguration of a new Biden administration.

With sanctions looming, Huawei has stockpiled critical radio frequency chips to ensure they can supply Chinese telecom operators with the 5G technology they launch in 2021. They partnered with TSMC to ramp up production at the end of 2019 for their 7nm Tiangang communication chips for 5G base stations.

During the fourth quarter of 2020, when combined with other trade sanctions, other customers of China’s leading chipmaker Semiconductor Manufacturing International Corporation (SMIC) were also forced to place large orders with their alternative suppliers, depleting available capacity.

In addition to these changing trade policies and their knock-on effects, significant and unpredictable risk events continue to cause production delays or disruptions in the automotive value chain. We recently commemorated the tenth anniversary of Japan’s “3.11”, the magnitude 9.0 earthquake off the coast of Sendai and the associated tsunami and nuclear power plant disasters that had a profound impact on the single source of supply for Toyota and other automotive OEMs.

In 2016, another major earthquake hit southern Japan and Toyota’s assembly lines were shut down, further showing the weakness of the JIT approach in the face of disaster.

And just like that, we come to 2020, the year the world has been hit by a global pandemic.

There has been a lot of discussion around the drastic changes in demand brought on by Covid-19. Growth in consumer electronics comes from new smartphones, new video game consoles, and a surge in demand for those who need technology to work from home.

Meanwhile, auto demand fell during the worst months of the pandemic as people bought fewer cars. What no one expected, however, was the unexpected turnaround in the fourth quarter that brought that demand back.

In a previous article, the intricacies of the automotive IC shortage were analyzed, including a unique perspective from Supplyframe’s Design-to-Source Intelligence (DSI) network. Supplyframe CMO Richard Barnett shares his advice for automakers this season of shortages.

We also recently spoke with Mike Hogan, Senior Vice President and General Manager of Automotive, Industrial and Multimarket at GlobalFoundries. He shares his insights in another recent article.

In this article, we examine the process of semiconductor fabrication and the challenges posed by trying to scale up such an expensive and specific process.

Hogan also shared a few other points about the current shortage, noting that steady demand over time makes the auto industry’s JIT approach easily workable. Given the current shortage, Hogan reminds us that this model has not been adjusted to account for the volatility and expected strategy of the semiconductor supply market in over four decades.

As Hogan said, the root of the problem is not the total capacity problem, but the capacity problem of the many technology nodes advocated by other industries such as consumer electronics. Automotive OEMs buy a variety of electronics from Tier 1, they have a variety of suppliers who may or may not make their own chips, but in the end, the fab has no visibility into where the chips are going sex.

Also, OEMs serve multiple targets and target multiple Tier 1s, so even they can’t say exactly which chips should be given higher attention. Hogan also mentioned two major changes to automakers over time:

Differentials in modern cars are semiconductor technology. The entire user experience revolves around these types of chips. As he puts it, “it’s not just about power windows anymore”.

The industry as a whole has no grasp of the entire supply chain, nor a keen understanding of the technologies they rely on. Supply lead times have been relatively stable until recently, but the COVID-19 pandemic has dramatically altered demand and supply, exposing gaps in visibility and understanding. Hogan sums it up by saying, “Everyone wants more, but can’t articulate what (about the specific technology nodes they need)”.

Hogan went on to describe the digital economy as an inverted pyramid. Everyone is more dependent on the next step, from electronics to semiconductors to fabs. When you get to the bottom, there are only a handful of players on a supply basis who can make the semiconductors that the automotive and other electronics industries need.

Until then, these were correct and no one could see the problem with this structure. Responsibility is also pushed to the bottom of the pyramid – key Tier 1 and semiconductor suppliers, while automakers assume a certain percentage of capacity is reserved for them, which is not the case.

Hogan advises automakers to act more like smartphone makers because those manufacturers know where their supplies come from and where they go, and plan their supply chains accordingly.

However, this is only the first step. Let’s look to the future beyond the immediate shortage.

While this shortage is due to some immediate factors, other trends will continue to weigh on auto manufacturing at all levels over time. Statistics show that automotive electronics will account for 50% of the total vehicle cost by 2030, an increase of 15% over 2010.

This is consistent with the rise of self-driving cars and the complex electronics that have been presented during their design. In our discussions with Hogan, he argued that automakers have a responsibility to move the supply chain forward. Specifically, OEMs can use this opportunity to paint a bright picture for the future.

Hogan cited Tesla as an example. They design their own chips and architectures from scratch. This yields two distinct benefits: a connection to the supply itself, and not having to share it with other competitors or industries.

When we think about things like MCUs, OEMs are buying off-the-shelf technology that runs the risk of being used elsewhere. The cost is lower, thanks to total volume, but there is a dangerous assumption here that supply can be shared among all demand.

Hogan advises automotive OEMs and Tier 1s to rethink their product design and platform strategies. They can change the architecture to give themselves more control. When it comes to self-driving cars, GM doesn’t want to buy the same radar chips as Ford or Chrysler. These rivals are competing for the same technology, while the likes of Tesla make their own.

Hogan predicted a new normal, saying the only thing we can be sure of is that widespread change is necessary and inevitable. Fabs have seen some OEMs and Tier 1s achieve greater vertical integration and focus on making their own chips, a key strategy to increase the resiliency of supply chain elements and when supply chain elements are fragile be controlled.

Given semiconductors’ intolerance to rapid scalability, Hogan is optimistic about the future, saying things will work out, but future leaders will seek greater resilience and flexibility from platform design to supply chain coordination. design, while older businesses will take longer to adjust given the rigid nature of supply chains.

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