When 2020 came to an end, the world welcomed 2021 with hope and relief. Of course, the pandemic would persist beyond the new year, but many felt that the economy was on the fast track to a roaring recovery. And while the worst may be behind us, the aftershocks of the global shut-down continue to impact businesses significantly. These ongoing issues are numerous, however, one of the most pressing of them all is the shortage of semiconductor chips.
According to the Semiconductor Industry Association Global semiconductor sales increased 6.5 percent in 2020, demonstrating a rapidly growing demand for chips from Automakers and Tech Giants. The semiconductor chip shortage was unavoidable but is still manageable. By building a resilient, flexible workforce model and a strong, reliable network of suppliers, crises like this can be not only managed but capitalized on.
Before discussing potential solutions, it’s important to understand what’s actually happening and what industries will be impacted the most. As it stands, automakers are projected to lose billions of dollars in earnings this year due to a shortage of semiconductor chips. Semiconductor chips are primarily used in new vehicles for things like brakes, power steering, and infotainment systems. They serve as the brain of nearly all modern electronics. According to CNBC, automakers are ‘scrambling to get supplies of the chips, which have extremely long lead times due to their complexity.” The shortage is creating significant, large-scale issues because it’s far down the supply chain, causing a ripple effect through the entire network.
Companies like Ford Motor Co and GM are projected to each lose over $2 billion in earnings and may be forced to reduce production by upwards of 20%. The chip shortage is shaping up to be the first obstacle of many for the Electric Vehicle (EV) industry.
“No matter how bullish or conservative you are on EVs, the next 10 years are going to be a form of chaos for the industry.”
– Simon Moores
Managing director of research firm Benchmark Minerals
Why is this happening?
To put it plainly, the Coronavirus pandemic has been the primary cause of the chip shortage. The reasons why are numerous:
- Global-wide shut-downs caused production to freeze up and stock to drain.
- The demand for electronics boomed, increasing competition between Tech Giants and Automakers for the dwindling number of chips.
- Automakers underestimated consumers’ demand for cars in the second quarter of 2020 and decreased production, further spiking demand.
- The cost of silicon has risen substantially due to the mass production of the COVID-19 vaccines; the silicon needed to make the vials is the same as the silicon used to manufacture chips and personal computers.
According to Razat Gaurav, CEO of supply chain software and analytics firm Llamasoft, “This is a classic example of the bullwhip effect… Small changes in demand, as they propagate further upstream in the value chain, the variability, and the volatility grows dramatically.”
The COVID-19 pandemic has been disastrous in many ways, and businesses will be dealing with the consequences of it for years to come. A chip shortage may have occurred without the pandemic’s influence, but it’s clear that the pandemic accelerated and worsened the issue.
The reality is, much like the global pandemic, there’s no easy fix for this crisis. There is only what should have been done sooner*, and what can be done now. Many automakers, like Toyota and Tesla, began making chips in-house some time ago, however, they are still projected to experience slow-downs in production. Automakers like Hyundai caught wind of the looming shortage and started stockpiling chips months ago, but depending on how long the shortage persists, they may end up in the red, too.
Moving the production in-house may not be the solution, especially when the issue stems from a lack of raw materials, rather than the manufactured product itself. For most companies, the best way to get through this crisis is to cultivate strong, stable relationships with their suppliers, partners, and personnel. It is essential to ensure that your business is working with experienced, trustworthy suppliers whose core aligns with your business’s needs.
The coming months will prove difficult, and there’s no easy way out. All anyone can do is buckle down and bolster up. Focus on what can be controlled and revitalized, like your workforce and network of providers.
At MAU, through people, processes, and technology, we are dedicated to supporting the companies we work with, and their supply chains, during both booming success or economic downturn. It’s our job to cultivate success, navigate struggles, and build stronger supply chains: together.
The supply chain has been disrupted significantly and in unprecedented ways over the last year. Download the White Paper below, where we break down the specific issues that cause a brittle supply chain and explore the most effective solutions for each.