Global microchip shortage in automotive industry reinforces need for better supply chain planning

By Peter Maithel

November 8, 2021

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The global shortage of microchips is severely impacting the automotive market with no fast or easy resolution within sight. While this supply chain disruption has evoked the attention of world leaders, legislators, and industry experts, the problem persists. Simply put, there aren’t enough chips to meet demand. Some short-term tactics may help contain losses for stakeholders, but most lessons learned require long-term changes in strategy and supply chain planning. Fortunately, putting advanced technology in place can help significantly mitigate the impact of similar supply chain disruptions in the future.

How bad is the current chip shortage?

As cars have almost literally become smartphones on wheels, semiconductors have become increasingly critical for a variety of applications, from fuel-pressure sensors, to digital speedometers and artificial intelligence-driven tools that assist with parking, finding the next fuel station, or alerting the driver when an oil change is needed. Without these tiny silicon wafers, the auto industry’s post-pandemic recovery has stalled, as manufacturers are unable to complete orders. By some estimates, the impact on global production volumes is expected to be about 7-to-8 million units, and McKinsey reports that major carmakers have already announced significant rollbacks in their production due to chip shortages, lowering expected revenue for 2021 by billions of dollars.

Where did all the chips go?

The trouble began in the early months of the COVID-19 pandemic, when auto sales plummeted as much as 80% in Europe, 70% in China and nearly 50% in the U.S. The lack of demand for new cars caused factories to close, workers to be sent home and orders for parts and components – such as semiconductors – to be cancelled. This may have been shortsighted. Tech Republic reports that when automotive OEMs shut down, cancelling orders, they left disgruntled chip suppliers holding inventory and excess capacity. At the same time, some sectors needed more semiconductors to meet exploding demand from housebound consumers and remote workers. Sales spiked for PCs, tablets and consumer electronics, as students and workers set up workstations at home and people consumed more streaming media. Those manufacturers were happy to snap up the chip inventory. Now, they aren’t letting go.

Who is hurt by the chip shortage?

The impact is far reaching, beyond just frustrated car shoppers. When factories close, jobs are lost, crippling the economy. Industry Week reports on the political ramifications, saying, “The chip shortage due to manufacturing snags has had a massive impact on the U.S. economy, hindering auto production and driving prices higher.” The White House has held meetings with U.S. semiconductor industry executives and European leaders to try to ease the current chip crunch and work on longer term solutions.

Changes are being put into action. UK’s Fleetnews says, “The sector is clearly navigating through a period of disruption. Overall, given the chip shortage, automakers are increasingly compelled to learn from the current situation to adapt and tackle the future in a more efficient manner.”

Some OEMs are taking matters into their own hands, trying to develop their own microprocessors and even software. While this may mean more control, many experts consider this economically impractical, as automotive chips are typically low-value, commoditized items. Investing in building foundries, a high-cost endeavor, would take decades to break even.

An exception is Tesla, reports Industry Week. It has designed the microchip for its Full Self-Drive system, producing the chip too. The investment may be paying off. In the second quarter, the carmaker delivered a record number of vehicles and topped $1 billion of net profit for the first time.

The European Union wants to get into the chip business

It was recently announced that the European Union is planning to address the issue through legislation, hoping to create “tech sovereignty” in the face of the ongoing shortage.

“Digital is the make-or-break issue,” EU chief Ursula von der Leyen told the European Parliament in her annual State of the European Union address. EU countries plan to spend collectively more than 160 billion euros ($190 billion) to boost that sector in coming years – some 20% of the bloc’s 800-billion-euro COVID recovery fund.

The EU wants to be the source of 20% of the world’s semiconductor production by the end of the decade, according to a roadmap presented in March by the European Commission.

What can be done for short-term relief of the chip shortage?

Gartner suggests that automotive companies remain vigilant, continuing to negotiate with chip suppliers. “Since the current chip shortage is a dynamic situation, it is essential to understand how it changes on a continuous basis. Tracking leading indicators, such as capital investments, inventory indices and semiconductor industry revenue growth projections as an early indicator of inventory situations, can help organizations stay updated on the issue and see how the overall industry is growing,” said Gaurav Gupta, research vice president at Gartner.

How can we respond to the chip shortage in the longer term?

Technology can help overcome the complex challenges:

Data Insights. Manufacturers can look to technology to help them leverage data and make sense of the economic indicators. Analytics will be an important weapon in this battle but must be applied strategically – projecting likely outcomes, as well as understanding historical influences.

Extend supply chain visibility. The importance of supply chain visibility is crystal clear. And visibility must extend beyond just tier one suppliers, all the way down through the layers of the entire supply network. Using secondary options, though, such as small cargo ships, adds some reliability concerns, complicating issues in another front. This is likely to be a long-term effort with some trial and error. Drilling down into this detail is the only way to obtain a true picture of potential bottlenecks and risks.

Maintain supply chain flexibility and mitigate risk. It isn’t enough to observe potential trouble spots. Companies must also be able to take action, reassigning orders or re-mapping shipping routes, as needed, to keep inventory moving, routed to the most optimal location. Platforms that link trading partners via common processes and shared data can provide enhanced sense-and-respond capabilities, thereby significantly reducing risk.

Collaborative innovation. Changing product design specifications may be able to help ease some inventory gaps. Procuring consumer-grade chips with more capacity (and higher costs) may turn lower priority automotive accounts into ones that receive more attention from semiconductor producers.

Infor customer SEG Automotive turns to technology to manage complexity

Some tech-savvy companies are already applying technology to improve a wide variety of operational objectives, including supply chain planning. Global automotive supplier SEG Automotive, for example, relies on Infor CloudSuite Automotive to address today’s many market challenges. As a leading global supplier of drive components, SEG Automotive is in the center of today’s fast-changing trends. Infor’s multi-tenant cloud platform helps SEG respond with speed and agility. As cars have become more high-tech, SEG Automotive has kept pace, also taking advantage of sensors and AI technology in its product design and earning recognition as a technological pioneer. This transformation requires lean processes that support innovation and product development.

We can improve not only our workflow management but also utilize modern methods in digital manufacturing and machine learning,” says Tim Zimmermann, ERP Director, SEG Automotive. “This allows us to raise both production optimization and automated monitoring of our production to a new level.

SEG Automotive has launched several Industry 4.0 technologies to optimize the use of data, connectivity, and robotics. CloudSuite Automotive supports these modern processes. The solution enables the standardization of digital business processes, improves end-to-end visibility, and helps the organization apply integrated business planning and AI-driven business insights, especially important during this semiconductor shortage.

Digital networking with all business partners and the provision of data in a centralized data lake will lead to faster and more efficient decision-making and easier reporting in the future. A central view of all company data means that industry 4.0 and machine learning initiatives can be implemented strategically.

SEG Automotive is an example of an enterprise that is putting technology in place to help it address modern complexity. As the chip shortage – and other challenges – unfold, SEG Automotive and other manufacturers using advanced cloud solutions will be better equipped to respond with agility and intelligence. Modern tools won’t solve all supply chain challenges, but they have proven to put companies in a better position moving forward.