Costly microchip shortage hitting auto sector hard: What to know - Crain's Detroit Business

A microchip shortage that has idled several automaker plants around the globe — General Motors hit pause on production last week at three plants that are expected to remain shuttered until at least mid-March — and shifting auto supplier production is being blamed on a spending glut on consumer electronics like computers and speakers during the pandemic.

Personal computer sales were up 4.8 percent to 275 million units in 2020, according to data from market research firm Gartner. Last year was the largest bump in PC sales in a decade. In fact, 2020 was the largest year on record for consumer electronics at $442 billion, according to the Consumer Technology Association, known for its popular annual CES conference in Las Vegas.

All of the computers, wireless earbuds, gaming consoles and wireless speakers require microchips, and increased demand does create a bottleneck.

But the root of the issue that's projected to cost carmakers as much as $61 billion in revenue this year starts earlier and is of the industry's own creation as it responded to market forces at the start of the pandemic last year.

Consumer electronics makers simply filled the void left by automotive companies as they pulled back production, starting in late January as COVID-19 ravaged China, and now the auto industry can't get back the capacity it gave up a year ago.

"When COVID hit last year, all of the auto orders dried up," said Phil Amsrud, senior principal analyst of automotive semiconductor research at market research firm IHS Markit in San Francisco. "But the consumer electronics industry saw the recovery and read the tea leaves faster than autos, so they began gobbling up capacity. When the market recovered and auto companies re-engaged the supply chains, it was too late and there was no more capacity."

Chip orders from the auto sector now face a lead time of up to 30 weeks from only 12 weeks to 16 weeks before the pandemic, Amsrud said.

The capacity conundrum is likely going to cost the auto industry millions, if not billions, of dollars as they battle for a place in line with an industry that has only a handful of major players — Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, operates roughly 50 percent of all chipmaking capacity globally.

Vanguard International Semiconductor, a subsidiary of TSMC focused on automotive chips, was reportedly moving to increase chip prices by as much as 15 percent, Nikkei Asia reported last month. Automotive chip makers Japan-based Renesas Electronics and Netherlands-based NXP Semiconductors previously announced price hikes on the in-demand chips. The price hikes will be enacted across the board by March, Nikkei reported.

GM told investors last month earlier this month the shortage cut earnings in 2021 by $1.5 billion to $2 billion. Ford Motor Co. said it may lower its earnings forecast by $1 billion to $2.5 billion in 2021 thanks to the shortage.

The bottleneck is going to be exponentially felt by the auyto supply base. For example, Continental Automotive, the Auburn Hills-based North American subsidiary of Germany's Continental AG, is "modifying production schedules" across its North American plants — translation: cutting shifts and hours — in response to the chips shortage, the company told Crain's in an email.

Southfield-based Lear Corp. CFO Jason Cardew told investors last week the supplier expects production interruptions related to the chip shortage.

It's no doubt the rising prices of chips will also lead to pricing pressures from automakers on suppliers, which ultimately will impact bottom lines there as well.

Meanwhile, TSMC reported a 50 percent spike in net income in 2020 on only a 25 percent rise in sales. Taiwan's United Microelectronics Corp.'s income for the third quarter of 2020 tripled, Nikkei reported.

"... it's true that we chipmakers are in a relatively advantageous position based on the supply-demand balance," UMC CFO Liu Chi-tung told the Nikkei in late January.

The question remains when will the supply-demand equation for chips even out.

The auto industry finds itself in a quagmire because there's not a lot of incentive for chipmakers to choose autos over consumer electronics. The annual smartphone market alone is more than 1 billion devices, compared with fewer than 100 million cars. And with lower-margins, auto chips are less profitable than consumer devices. Compounding the problem was the Trump administration's move to blacklist China's Semiconductor Manufacturing International Corp. in December, further constraining supply and forcing auto suppliers rushed to find capacity elsewhere.

Chipmakers in the U.S. earlier this month penned an open letter to the Biden administration looking for handouts to fund semiconductor manufacturing in the U.S. as part of economic response to the pandemic. Industry leaders like Intel, AMD, Nvidia and Qualcomm urged government intervention toward leveling the playing field.

"... our share of global semiconductor manufacturing has steadily declined from 37 percent in 1990 to 12 percent today," the letter said. "This is largely because the governments of our global competitors offer significant incentives and subsidies to attract new semiconductor manufacturing facilities, while the U.S. does not. Others have also increased R&D investment substantially, while the U.S. investment in research has been relatively flat. As a result, the U.S. is uncompetitive in attracting investments in new fab construction and our technology leadership is at risk in the race for preeminence in the technologies of the future, including artificial intelligence, 5G/6G, and quantum computing."

But any move by the administration to subsidize building of chip capacity would likely come well too late for the auto sector.

With lead times of more than 26 weeks, chipmakers won't catch up to current automotive demand until the third quarter of this year and likely won't meet new demand until next year, Amsrud said.

"This could be a linger effect into 2022," Amsrud said. "With chipmakers starting to prioritize automotive orders, that alleviates some of the pressure but with capacity really constrained, this problem isn't going away any time soon."

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