Why the global chip shortage matters to you

The global semiconductor crisis has resulted in a shortage of new cars around the world and, for the car industry at least, it’s a greater crisis than the COVID pandemic that kicked it off.

Today’s new cars need between 30 and 50 semiconductors, or computer chips, supplied by as many as 10 different companies, and a problem with just one supplier or one 10- or 15-cent chip is enough to halt production at an entire car factory.

Chips are needed for everything in a new car today. Modern infotainment touch-screens need up to five chips to run, and many more are required by systems like autonomous emergency braking, anti-lock brakes, stability control, adaptive cruise control, airbag deployment, self-parking systems, seat memory, etc.

The worldwide chip problem has led to a shortage of new cars in showrooms, and the cars that are available are generally the highest-margin models, because car-makers are desperately trying to recoup as much money as they can from chip-limited production.

Of course you can. Car-makers have naturally put all their chips into their most expensive baskets, so premium versions of most models will usually be available, in particular larger models from each brand.

But expect delays in new-car deliveries, and sometimes quite significant delays. And expect some models, particularly entry-level model variants, to be delayed significantly.

You can also expect some high-end equipment to go missing from some models, with such ‘decontenting’ already happening in Australia at Mercedes-Benz, BMW and other brands.

Other weird things have happened overseas, where Peugeot has ditched the 308’s digital dashboard in favour of an old-school analogue unit to save their chips for other models.

In cases like those when standard equipment is deleted, price have come down.

In general, however, the lack of new vehicle stock is pushing up new-car prices across the board, even at the bottom end of mainstream model ranges at the most popular brands, as demand continues to outstrip supply.

A byproduct of the semiconductor crisis is that prices of used cars have skyrocketed to record levels, especially for sought-after models, as stock remains tight.

It’s a classic symptom of low supply versus high demand, and the situation should keep prices at a premium for quality used cars for some time to come.

But because the values of near-new used cars is very strong, it’s a good time to sell one if you have a replacement on hand.

That has had a knock-on effect on cars slightly older than that, and then older and so on.

The cost of car-rental prices has also boomed in recent times due to the lack of new vehicle stock, because rental company contracts with car-makers dictate a set minimum supply of new cars per year.

In part, rental companies are used-car futures brokers, and it’s a golden time for used-car futures brokers right now.

Begged, borrowed and juggled the chips they actually have to build the cars they can, and in some cases idled factories.

It just takes one missing chip out of 40 or 50 to leave otherwise-complete cars piling up at a factory.

In the US, Ford has thousands of incomplete F-Series pick-up trucks, the Blue Oval’s most popular model, parked in paddocks awaiting chips. It recently made the unprecedented decision to ship some of those vehicles to dealerships, who will complete the production process.

MINI, Jaguar Land Rover, Mercedes-Benz, Toyota, Hyundai, Mazda and Stellantis have all closed plants due to the lack of chips.

And Volkswagen’s new age of electric cars has faltered for the same reason, with the ID.3 and ID.4 EVs stuttering compared to last year.

Goldman Sachs analysts suggest the industry will lose three per cent of its production in 2021, taking $US20 billion in profit with it.

Stellantis has admitted it will build 190,000 fewer car this year due to chip shortages, while Volkswagen will be down by more than that.

Even high-margin cars like the Volkswagen Touareg, Porsche Cayenne and Audi Q7 have been hit, with a one-week stoppage at the Bratislava factory last quarter.

Car-makers are ramping up production of their own static- and dust-free chip factories (though they’re not specialists at this sort of thing) and chip-makers are also increasing their automotive production, but without enthusiasm.

None of the fixes will be up and running this year, and some executives insist it will be early 2023 before things are back to normal.

They would if they could, but they don’t fit and they’re not strong enough.

Automotive-grade chips are designed to operate between -40 degrees and +50 degrees, with all kinds of vibration and electrical interference tests in between.

Leave your phone and its cutting-edge wafer chips in the sun for 10 minutes and it will tell you it’s too hot to work.

There are car-makers being quoted 30 times the pre-COVID price for their chips, because chip-makers would need to reconfigure their production back to automotive, so the car industry’s recovery could take two to three years to complete.

And few chip-makers are keen to build automotive-only production lines because they don’t deliver the right profit margin.

Every car-maker operates on a version of Toyota’s Kanban just-in-time production model, so when China and Europe shut down for COVID, so did their factories.

The systems don’t allow for huge backlogs of spare parts, so they called all their suppliers and hit the pause button.

When they called back to ask for their chips again, they found they’d dropped to the back of the queue, despite using 10 per cent of global chip production.

Automotive-grade chips are robust and long lasting, but they haven’t been cutting edge for 15 years and deliver relatively low profit margins to the chip-makers.

When the chip-makers were given the bad news in early 2020, they simply pivoted to the booming smartphones, gaming consoles and computers that were in demand during lockdown.

The chips used in these products are generations ahead of the automotive chips and deliver higher profit margins.

Ironically, car-makers found far higher demand for new cars during COVID, because people didn’t want to use public transport.

Well, if you could make multiples more margins off a chip for a gaming console versus a car, you’d take it, right?

Yes, but there are 90-odd million cars built every year multiplied by, say, 40 chips per car, so 3.6 billion chips is still a $US39.5 billion market.

While the chip-makers tried to cover it, even nature conspired against them.

Firstly, chips take a lot of water to make and there was a drought in chi-happy Taiwan.

Secondly, there was a severe winter in Texas, which is the chip-making centre for Samsung, Infineon and NXP.

Then a fire ripped through the Renesas factory in Tokyo, knocking out a third of the world’s microcontroller chip supply in one day.

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