The health crisis has had a profound impact on the global economy. On the front lines, the automotive industry suffered as more than a third of the population was confined to their homes. The entire sector prepared for a crisis that was expected to last: forecasts were revised downwards, budgets were reduced, inventories were sold and orders were suspended.

And yet, the automotive industry has recovered faster than expected – too quickly for many automotive suppliers, especially semiconductor manufacturers.

 

Semiconductors have been in increasing demand for several years. In addition to the automotive industry, where they account for more than 40% of production costs according to Deloitte, microchips are now found in almost every domestic electronic device: smartphones, game consoles, smart devices, household appliances, routers, etc. All of these electronic products have seen demand explode with people stuck at home during lockdown, largely filling the void left by the automotive industry. By early fall 2020, tensions over the supply of these key components even led Apple to postpone the release of its latest generation of smartphones.

However, this saturation of global production capacity is only the first part of the problem. The electronic chips used for a PS5 or a dashboard are not the same, and manufacturers have had to modify production lines to accommodate this change in demand. By the time the automotive industry took off again, the world’s semiconductor production had shifted to other markets. And these changes were not trivial: switching production from one type of chip to another requires several weeks or even months of set-up in the factory. The speed of the automotive rebound surprised chipmakers, who were unable to keep up, and shortages soon followed.

 

This supply crisis has also been compounded by other factors. In particular, trade tensions between China and the United States have led Washington to block sales of U.S. chips to certain Chinese companies. As a result, companies like Huawei have begun to stockpile semiconductors, further contributing to the disruption in demand.

Finally, to make matters worse, one-off events have further complicated the production and supply of these important components, including a fire at the factory of one of the largest manufacturers, extreme cold weather in the southern United States, and the blockage of the Suez Canal.

 

Semiconductor supply has therefore become a strategic issue for both industries and governments. At a time when the words ‘technological sovereignty’ and ‘resilience’ are resonating around the world, investments in production capacity for these key components are increasing. However, since the construction of a new production site can take several years and requires billions of dollars, the shortage is likely to continue for many more months.

Although production capacity is at the heart of this crisis, the impact could have been reduced by investing more in supply chain resilience. Tools like artificial intelligence now allow better management of complex and volatile demand, and above all, better collaboration between the different links in the supply chain would have enabled companies to anticipate the rebound in the automotive industry and make decisions upstream.

 

For example, the production lines for the Peugeot 308 adapted well to the shortage even after weeks of shutdown. By replacing the new digital speedometers, which use a lot of chips, with the old needle-based systems, the production lines were able to quickly restart.

More upstream visibility would have allowed Peugeot to be more responsive in its decision-making and could have potentially avoided stopping the production line. According to EY, improving visibility is the number one priority for decision-makers over the next three years. However, tools are already available to meet this need. It is now up to companies to equip themselves; their resilience for future crises depends on it.