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

Increase in Demand

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. These electronic products have seen demand explode with quarantine, largely filling the void left by the automotive industry. By early fall 2020, tensions over the supply of these key components impacted technological giants. Even Apple postponed 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 different. Hence, the 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 setup in the factory. The speed of the automotive rebound surprised chipmakers, who were unable to keep up, and shortages soon followed.

Supply shortage

Other factors have also compounded this supply crisis. 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. Unfortunately, this included 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.

The Future

Semiconductor supply has therefore become a strategic issue for both industries and governments. Today, we see that the words ‘technological sovereignty’ and ‘resilience’ resonate worldwide. However, investments in production capacity for these critical components are increasing. Since constructing a new production site can take several years and requires billions of dollars, the shortage will likely 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 restart quickly.

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.