A year into the semiconductor shortage, automakers are adjusting their sourcing relationships as the global supply chain remains backlogged. Leading car makers are forming alliances with chip suppliers in the hopes of avoiding another year of limited production.
Automotive companies lost an estimated $210 billion in 2021 due to the scarcity of chips. The shortage was caused, in part, by automakers’ traditional approach to semiconductor supply chain.
“In the past, auto makers have operated from the concept of unlimited supply — I just have to get more and put it somewhere,” said Michael Farlekas, CEO of E2Open, a supply chain solutions provider. “In the high-tech space, supply is always constrained, so server and laptop makers have needed to have more integrated supply chains.”
Now, however, supply limitations have pushed automakers toward better communication – and even commitment — with component distributors and suppliers.
“Given the long-term nature of the supply demand imbalance here, the more information we have from a customer the better we can help them,” explained Michael Long, CEO of Arrow Electronics Inc. at a recent earnings briefing. “[A preferred supply program] or that sort of contractual arrangement tells a supplier that you’re serious about getting supply over the next three years.”
Automotive companies have developed a reputation for “pounding on the table” to get the supplies they need. Vehicles have a long lifecycle and carmakers cancel orders they’ve placed well in advance. Computer, smartphone and other tech OEMs update their orders more frequently, provide better visibility into demand and use many commodity products that can be sold elsewhere if orders are cancelled.
Several automotive companies have taken steps to become more integrated into the electronics supply chain. As of late 2021:
- Ford signed a nonbinding agreement with U.S.-based semiconductor supplier GlobalFoundries to collaborate on developing chips for Ford vehicles, and that the companies would explore expanding domestic chip production.
- GM later said it was forging ties with some of the biggest names in semiconductors—including Qualcomm Inc. and NXP Semiconductors NV—and has agreements in place to co-develop and manufacture computer chips.
- Mercedes-Benz cars set up a direct line of communication with all chip suppliers, including wafer producers in Taiwan.
- SEMI and the Center for Automotive Research signed a memorandum of understanding for joint exploration to advance increased supply chain collaboration between the semiconductor and automotive industries.
“Share your forecast and the supplier is going to commit to a percentage of your production capacity that you think you need,” said Arrow’s Long. “They’re not going to allow you to stock it and put it on the shelves and not ship it or not manufacturer with it. It opens a different type of dialog.”
Even chip makers don’t expect supplies to rebound anytime soon. Intel CEO Pat Gelsinger in late December predicted the shortage will last at least until 2023. The chip industry has committed to building 29+ fabs over the next few years that will take time to ramp up production. Meantime, global logistics remain chaotic – a Covid outbreak in China has resulted in crew quarantines and shipping delays. Omicron-related worker shortages are expected to impact U.S. manufacturing for the next several months.
“The pandemic has impacted the entire supply chain,” said Juan Terrazas, research oriented professor and director of the College of Engineering at CETYS University. “This impact was so severe that there is very little risk of [chip] overstocking in the next few years.”
“Although we are already seeing some signs of recovery due to increased installed capacity in the United States and Asia, it is very likely that a full recovery will be seen until late 2023 or early 2024,” Terrazas added.
The demand picture for semiconductors remains rosy. A recent Gartner estimate puts total semiconductor revenue at a growth rate of 26.9 percent per year, reaching $591.4 billion in 2021. Non-memory revenue is expected to grow by 23.7 percent, reaching $422.6 billion in 2021. This will break the $500 billion milestone as the serious semiconductor supply chain issues drive higher ASPs after the Covid-19 pandemic.
Gartner also predicts that half of the top 10 automakers will address these challenges by designing their own chips by 2025. “Automotive semiconductor supply chains are complex,” said Gaurav Gupta, research vice president. “In most cases, chip makers are traditionally Tier 3 or Tier 4 suppliers to automakers, which means it usually takes a while until they adapt to the changes affecting automotive market demand.”
For companies that aren’t positioned to design chips, new supply chain strategies remain the best option for sourcing. The shifting reality of the semiconductor market has shone a spotlight on the limitations of the buffering and stock approach of the typical automotive supply chain.
“Many of the products used in the automotive sector also find applications in the industrial sector for IoT applications, machine learning and digital transformation projects [smart manufacturing],” said Terrazas. “Orders that were historically sent to the automotive sector are now being taken advantage of by other sectors. So, in the long term, it will be necessary to increase the capacity to manufacture a greater number of integrated circuits. The world will be more connected due to the new 5G technology and the demand for integrated circuits will continue to increase in the coming years.”
Adopting new sourcing strategies can be daunting, but customers must reconsider supplier relationships. Automakers in particular do not have visibility into the upstream materials and packaging companies critical to making chips. Stronger bonds are formed by better forecasting and a deep dive into all layers of the supply chain.
“The solution begins with data,” explained E2Open’s Farlekas. “Too often, people don’t focus on the data but think about the algorithms they use. The most valuable piece of the puzzle, though, is the data, and the value of that is a function of timeliness, completeness, and accuracy.”
When an OEM has real-time, comprehensive and accurate data they can provide better intelligence to their suppliers. Supply and demand are intricately connected—and having clear understanding of what components are needed when builds stronger relationships with a supplier. “The one who talks to the supplier every day will be the one who gets the supply,” said Farlekas.
Creating a longer chain
Automotive companies also need to think about the supply chain more broadly, extending it beyond the component makers. By optimizing every aspect of the supply chain, from planning to transportation, automakers can create a more agile system.
One E2Open customer, Jaguar Land Rover (JLR), created a supply chain council that worked to optimize the breadth of supply chain activities through the use of technology.
“Most auto companies are incredibly siloed,” said Farlekas. “That’s an organizational problem. You need to transcend that by thinking from end to end, rather than breaking it down.” The JLR council decided what IT solutions would move the organization forward holistically rather than benefiting a single node of the system, he added.
Once clean data and a comprehensive understanding across the supply chain is achieved, the right technology can be applied. Currently, digitization technology is used sparingly in supply chains, and yet manufactures point to a variety of benefits.
To avoid problems in the future, it is important to better integrate supply chains, Terrazas concluded. “The semiconductor industry must make investments to achieve greater automation and increase its production capacity to lower semiconductor costs. Automotive assemblers and the semiconductor industry must adapt to the new market reality.”