Is the automotive chip crisis improving?
- December 7, 2021
For Canadian job shops serving the automotive sector and hurt by automakers shaving back their production plans due to semiconductor shortages, is there reason to believe things are about to get better?
The most recent forecast from AutoForecast Solutions carried a bit of encouraging news. The global automotive forecasting firm dialed back its worst-case estimate for the impact the ongoing microchip shortage will have on North American car plants. Although still projecting the removal of 3,414,372 cars and trucks from North American production plans, the new forecast is almost a 900-unit improvement over its previous worst-case scenario.
It’s a small improvement but does it indicate the tide is about to turn? Are automaker attempts to solve the microchip shortage issue by removing options such as heated steering wheels from their immediate production plans working?
These are questions of particular importance to Canadian job shops, which have been harder hit than those in other countries. Production in Canada was down 6.6% up to July of this year compared with a year earlier. Canada is forecasted to produce just 1.2 million vehicles this year, down from 1.4 million last year. That is also far off the 2.2 million yearly average for the decade up until 2019, according to a Scotiabank Economics report. Canadian automotive production hasn’t been hit this hard since 1982.
Canada has been hampered by its vehicle production mix through the semiconductor crisis. Auto OEMs are pushing the semiconductor supply they are able to get towards their highest margin vehicles, which are SUVs and pickup trucks. That has curtailed minivan production for the Stellantis plant in Windsor and sedan production at its plant in Brampton and at Ford’s Oakville plant.
Job shops suffering through that reality can take some heart from the improved AutoForecast Solutions outlook as well as from some encouraging remarks made recently by Gokul Hariharan from JPMorgan – as long as they can remain patient.
The semiconductor shortage is not expected to go into 2023, according to Hariharan, speaking on behalf of US investment bank JPMorgan. It’s possible the situation could start showing improvement by the second half of 2022.
Hariharan pointed to two bright spots which will help build up necessary supplies. First, large companies such as Tesla are looking beyond established chip makers and bringing certain aspects of chip development inhouse as a means to control their own narrative. Second, there are new Chinese semiconductor providers coming onboard and focusing on legacy technologies, which require less advanced chips. That should allow existing chip suppliers to focus to a greater extent on the industries requiring more sophisticated semiconductors.
Deloitte, a multi-national consulting group, estimates the cumulative revenue impact of the semiconductor shortage will likely be over $500B in lost sales globally from 2020 to 2022 (including all industries). And in a paper on the issue it warns such a shortage could happen again.
“Some might think that today’s shortage is a one-time event. As long as we don’t have a once-in-a-century global pandemic, a massive fire at a key Japanese chip plant, a Texas freeze, and a ship stuck in the Suez Canal — all coinciding — the next shortage couldn’t possibly be as severe, right?” Deloitte asks.
The concerning answer it provides is that it’s almost certain that over the next 10 years some combination of global and regional events could once again threaten the semiconductor supply.
“The chip manufacturing industry and supply chains, as they currently exist, inherently are vulnerable to disruptions, which makes a shortage inevitable,” Deloitte concludes. It points out that over the past three decades, we’ve seen six shortages of duration or magnitude similar to today’s.
In response to the shortage, the chip industry is looking to increase capacity at an unprecedented level. Capital expenditures from the three largest players will likely exceed $200 billion from 2021 to 2023, and could reach $400 billion by 2025. Governments are also looking to help out.
Deloitte expects global wafer starts per month of 200-millimeter wafers (which are processed in chip factories and sliced into individual chips) to increase from about 20 million in 2020 to 30 million by the end of 2023.
But it says that still may not be enough. Deloitte advises that on top of raising overall capacity, the chip industry should build up local capacity. Right now the level of chip production concentration in East Asia (including Japan and China) is near 60%. Countries outside this region need to invest in local supply.
It also has advice for stakeholders such as the automotive sector which rely on semiconductors: “Chip buyers, distributors, and retailers need to determine which level of lean to choose. There is such a thing as too lean,” Deloitte warns.
The Canadian job shops serving the automotive sector can only hope their OEM customers take that advice to heart.