Supply chain predicaments
The semiconductor shortage affecting the auto industry is also a warning signal to manufacturers that they may be vulnerable to other supply chain disruptions that could sideline plans or derail economic recovery.
Many automakers are scaling back production as they run on a short supply of the type of microchips that are needed for control modules, responsible for systems such as infotainment, safety and fuel management. Although the semiconductor production shortfall is not expected to last beyond this year, it will result in an estimated 2.2 million fewer vehicles produced globally through the end of 2021, costing jobs and hurting revenue.
Semiconductors are just one component in a complex supply chain for vehicle production, and the extent of this loss has some original equipment manufacturers (OEMs) wondering if the next supply chain predicament could cause more widespread disruption. For this reason, many OEMs are mapping out their supply chains, looking deeper into their suppliers’ suppliers and establishing paths of collaboration to find and secure the gaps that exist.
Short-term and long-term implications
Prudent companies are taking this lesson as a cautionary tale that they must be prepared to not only respond to future disruptions as quickly as possible, but to avoid them whenever and wherever possible.
Supply chain executives are identifying where the vulnerabilities lie by carrying out a complete analysis of their vital components and identifying their sources across their supplier network. A single supplier may be affected by a fire, for instance, which could cause a bottleneck for other processes down the line. A regionally sourced supply, such as rare-earth metals, is vulnerable to geopolitical or climate catastrophes. High dependency on a single vendor is also risky, and some manufacturers are investigating built-in redundancies to mitigate those types of hazards. Going forward, OEMs and suppliers may also have to change the nature of their contracts to include better capacity planning and continuity models or to include penalties for suppliers who delay delivery.
Onshoring or near-shoring production of supplies allows greater control over some circumstances. Around the US, Europe and Asia, countries are attempting to expand capacity through increased investment and government support. India plans to build an independent semiconductor production facility. China aims to produce 70% of its chip needs domestically by 2025. The Biden Administration has made supply chain resiliency a top priority, and the CHIPS for America Act aims to incentivize semiconductor manufacturing and research.
Manufacturers will likely operate with a higher inventory of semiconductors in the intermediate future. Looking ahead, automakers may also decide to purchase supplies directly from semiconductor manufacturers. Governments and select auto suppliers are also looking at building in-house capabilities to produce their own semiconductors.
Although the semiconductor imbalance is on course to being corrected in the short term, global demand for semiconductors will remain high, and is expected to cause an increase in semiconductor prices. In December 2020, chip prices increased by 30% over the month prior3. As electric vehicle production (EV) grows, so will the global market for semiconductors, given that EV systems require more semiconductor content than internal combustion powertrains. Advanced driver assistance systems, such as lane-keep assist, adaptive cruise control and other autonomous driving aids, require a different type of chip that will put added pressure on foundries.
Getting ahead of the next supply chain crisis
This crisis is yet another instance in a growing list of breakdowns exposing a significant vulnerability in the auto supply chain ecosystem: manufacturers’ lack of visibility beyond the first couple of tiers in its supply chain. While the industry has developed a clear view of the big supply chain picture, manufacturers are unable to get ahead of the next disruption, whether that may be in semiconductors, steel, plastic or other materials. A robust, agile supply chain requires companies to be continuously vigilant of the three R’s of supply chain management:
Active, real-time monitoring of external inputs such as customer order volume, commodity prices and freight rates to act, government policy and natural and man-made disruptions
Diversify your supply chain and look for choke points. Redesign your processes and systems to be more plug-and-play to allow for flexibility to maintain operations in the event of crisis and move production to other facilities
Futureproof your organization for the next crisis by building resiliency into every organization structure, business processes and performance metrics
For now, the industry is still in reactive mode, and there is need for a concerted effort to resolve these fundamental supply chain visibility issues. Building a robust supply chain begins with an extensive look at the wider network of suppliers, anticipating and planning ways around scenarios that could cause a breakdown in the system.