“We are starting to see the situation bottom out.”
That’s how Honda Operating Executive and Head of Accounting Eiji Fujimura describes the current state of a global microchip supply crunch that has pushed new car prices to record highs.
Honda last week trimmed another 250,000 cars from the number it expects to build in the current fiscal year ending March 31. The reason? A lack of microchips needed to build them.
A Global Problem
In 2019, the last year before the COVID-19 pandemic triggered slowdowns in the global economy, Americans bought more than 17 million cars.
In 2022, we bought just 13.9 million, according to Kelley Blue Book parent company Cox Automotive.
But the slowdown didn’t come due to a drop in demand. Americans snatched up every car the auto industry could build. Prices soared as demand exceeded supply. By the end of 2022, the average new car sold for more than $49,500 – almost 5% higher than a year before.
Automakers couldn’t build as many cars as they wanted to because of a global shortage of microchips.
Today’s cars can contain more than a hundred tiny microprocessors. They control everything from traction control systems to navigation features.
In the early days of the pandemic, as governments worldwide imposed travel restrictions to limit the spread of the virus, demand for new cars plummeted. Automakers limited their orders for microchips, anticipating months of slowed vehicle production.
But chip factories didn’t slow like car factories did. Consumers ordered new electronics to facilitate working and attending school from home.
When vaccines allowed people to travel again, pent-up demand for new cars surged. Automakers tried to spool up their orders for new chips. But chip factories were already working at capacity. They still haven’t caught up.
Global Chip Supply Recovering
That problem has begun to ease.
Swedish-Swiss engineering giant ABB manufacturers everything from the robots that help assemble new cars to the electric vehicle infrastructure. ABB Chairman Peter Voser tells CNBC the shortage “was really an issue in 2022, specifically the first two, three quarters. If I look today at it, Voser says, “I think it’s now being sorted out.”
Malaysia Semiconductor Industry Association (MSIA) President Datuk Seri Wong Siew goes further. “We resolved the microchip supply disruption problem last November,” he tells Malaysia’s Star newspaper.
Automotive Chips are Different
But an increase in chip production doesn’t necessarily mean automakers can get the chips they need.
The auto industry doesn’t use the same high-end, high-speed chips as other industries. It needs older, lower-capacity designs.
The automotive industry’s modular design approach – the power window switches in an automaker’s most expensive vehicle are often the same as those found in its least expensive – means that today’s cars are littered with older, low-power microchips performing simple functions.
Chipmakers, like any business owner would, have concentrated on spooling up production of their highest-margin products. The cheap chips automakers need are a lower priority for them.
Ford Chief Financial Officer John Lawler told investors in early February, “”I know there’s been a lot of discussion about ‘Well, the chip supply issue is over,’ but on the larger, older nodes that are primarily the chips we use in the auto industry there is still capacity constraints.”
Automakers can’t just overbuild and use high-capacity chips for simple functions. Because cars are tightly regulated for safety concerns, components go through a rigorous qualification process. Manufacturers can’t easily swap in a different part.
Kurt Sievers, CEO of Dutch automotive chip giant NXP Semiconductors, acknowledges that supply of low-power chips is “still tight, which means we are still hindering car companies from building the cars they want to build.”
AutoForecast Solutions says that automakers worldwide have trimmed nearly 350,000 vehicles from production so far in 2023.
Automakers Reconfiguring Supply Lines
Some have responded by changing how they buy chips. General Motors CEO Mary Barra told the Associated Press last summer that the company is working to design cars that use fewer higher-power chips that control multiple functions. The company recently signed a long-term agreement with semiconductor manufacturer GlobalFoundries (GF) that will see GF dedicate production facilities exclusively to producing GM chips.
GF CEO Tom Caulfield told Reuters, “This is the automaker going right to the manufacturing foundry, reserving the capacity for their needs, making the appropriate co-investments with that foundry so that the best economics take place.”
The German automotive industry association VDA, meanwhile, is urging European Union lawmakers to set aside money for automotive chip production. “Europe must now invest in the production of chips relevant to the automotive industry and ramp up the production of chips with suitable feature sizes,” says VDA President Hildegard Müller.
