When the chips are down: Big Tech’s needs put dent in car output

They may look like lowly commodities that can sell for several to the penny. But at the moment, microchips are causing headaches across the auto industry.

As automakers hustle to get their factories and vehicle inventories back to normal levels under the shadow of the persistent pandemic, an international chip shortage is putting a new kink into that plan.

Subaru Corp. last week said it was cutting production at its only two auto plants, in Japan and Indiana. Ford Motor Co. idled one of its two big assembly plants in Louisville, Ky.; Toyota Motor Corp. reduced output of its Tundra full-size pickup in San Antonio; and Nissan Motor Co. slowed assembly of its popular Japanese market small car, the Note. Fiat Chrysler Automobiles has turned down the dials at two North American plants, and Honda Motor Co. cut production at one Japanese plant.

In every case it was the same: Somebody, somewhere in the auto supply chain, couldn't acquire all the chips needed to make their parts.

"This isn't going to go away quickly," said Phil Amsrud, an IHS Markit senior principal analyst who is tracking the simmering crisis. "It's a complicated situation. There's no capacity problem. There's plenty of capacity. The chip industry can make all the chips everybody needs.

"The root cause of all this is COVID. The system just got out of whack ... and it's going to take a while to get it back in order."

How long, exactly?

The COVID-19 crisis caused chipmakers to scale back their output and shift capacity from one customer to another. IHS Markit forecasts that chip-related supply wrinkles will linger into the second quarter and possibly even the second half.

That's bad news for automakers that want nothing more than to return to a more robust output of vehicles to satisfy consumers who are hot to buy.

But in recent weeks, the absence of chips has undermined them in North America, Europe and Asia. Late last week, Ford, Daimler and Audi said they would trim output in Europe, with Audi cutting back in Mexico as well. Other automakers told Automotive News they were closely watching their supply chains for potential disruptions.

The situation illuminates a new reality taking shape in the auto industry: The ever-increasing electrification of cars and trucks is putting automakers into more direct competition for vehicle components with the likes of giant cellphone, computer and TV manufacturers. The microchips critical to big-screen TVs and hot-selling video game systems also light up SUV consoles, power electric vehicles and permit advanced safety systems to apply the brakes before a driver backs into an unseen fire hydrant.

And now automakers and their parts suppliers are waiting in line behind Apple, Sony and Samsung.

"Not all chips are created equal," Amsrud said. "But they sort of are. The production capacity that might have gone to auto companies last year got shifted to some of the new gaming consoles that came to market last year."

Other issues also factor into the problem.

Intel, one of the world's biggest chip customers, last year put in an enormous order to one of the world's largest fabricators, Taiwan Semiconductor Manufacturing Co., or TSMC. "Fabs," as they are called, are expensive-to-build high-tech foundries that turn big blocks of silicon into millions of chips a year.

But they can turn out only so many — even as customers engineer their products to require an increasing number of them. Late last year, TSMC said it would build a new foundry near Phoenix for $3.5 billion. But the producer's full plan is to spend $12 billion on new U.S. capacity by 2029 — 10 times the cost of a typical auto assembly plant.

TrendForce, a Taiwan market research firm that monitors the electronics industry, last week said the past two years of U.S.-China trade friction also has affected chip supplies.

"Owing to the China-U.S. trade war and the COVID-19 pandemic, automotive semiconductor suppliers suffered poor performances throughout 2019 and 2020, which led them to maintain very low inventories of components," TrendForce senior analyst C.Y. Yao said in an email to Automotive News. "At the time, these suppliers did not aggressively procure components in response to upcoming market demand."

Yao said semiconductor suppliers simply have been unable to deliver on rising demand from automakers.

How dire the shortage will be is uncertain. In a report issued last week, AutoForecast Solutions said it expects the impact to be milder over the next few weeks, resulting in the loss of just over 200,000 vehicles globally. That is a small share of global output forecasts and a volume the firm said could be made up later in the year.

But the firm also said that aspects of the supply chain pinch likely will be lasting, prompting auto companies and their suppliers to rethink chip sources.

Amsrud said retailers and consumers will nonetheless share in feeling the production pinch this winter. Until chip supplies are back to normal, automakers will be forced to pick and choose which models to favor and which to sacrifice, he said. They likely will give priority to their most profitable models at the expense of more marginal vehicles.

"It will also show up in dealer inventories," Amsrud added. "Inventories are already lower than many of them wish. This certainly isn't going to help."