Chronic Auto Chip Shortage Pinpoints Players Ill Equipped To Survive.
“The nature of the shortage shows many manufacturers simply hadn’t grasped the crucial role of semiconductors and couldn’t foresee this shortage”
The chip shortage is not only a short-term problem for traditional auto manufacturers, it signals to investors which companies have been asleep at the technology switch and won’t survive the upcoming shakeout inspired by the move to connected electric cars and autonomous ones.
Only the biggest players like General Motors, Toyota and Volkswagen and emerging electric carmakers like Tesla and those from China will survive, according to Howard Yu, professor of management and innovation at the International Institute for Management Development (IMD) business school in Lausanne, Switzerland.
Consolidation in the industry means weaker players without the financial clout to survive will be consumed by the more powerful ones. High technology outfits with massive cash resources will be on the prowl too. Auto survivors will be the ones who ruthlessly commandeer high technology supplies and embrace the new direction, quickly, and with huge investments.
In an interview, management guru Yu said the chip crisis showed many auto makers, with the exception of perhaps Toyota, failed to understand the need to embrace electronics and nail down supplies.
“The nature of the shortage shows many manufacturers simply hadn’t grasped the crucial role of semiconductors and couldn’t foresee this shortage. They relied on middle-men like (big components suppliers) Bosch and Continental (of Germany) to do this for them. It’s like Apple building the iPhone and assigning the manufacture to some third party. Unthinkable. This shows how much of the automotive sector has lost touch with reality. They wouldn’t get their hands dirty and said things like ‘we have a contract to keep supplies coming’,” Yu said.
“This highlights the knowledge gap. These big automakers are great at banging the metal, but how to incorporate electronics and software that is the future and requires awareness of the new knowledge and I don’t see enough bringing the two – mechanical and electronics – together,” Yu said.
Yu is director of the Advanced Management Program at IMD.
As global auto production recovered from the coronavirus shutdown, it was hit by the semiconductor crisis, and a shortage of chips is going to be a cross the industry will have to bear perhaps until 2023.
As demand for new cars and SUVs recovered from the lengthy shutdown, it turned out other industries like gaming had been thriving during the enforced lockdown which confined people to their homes and stopped car use and car buying. Semiconductor makers were happy to switch production to new domestic customers, but when auto demand turned around, chip supply couldn’t suddenly be switched back on. And with many new cars using more and more high-tech components, this required bigger and more sophisticated electronics, and you have a perfect storm of supply aggravation for the industry.
According to consultants Alix Partners, the global chip shortage will cost automakers $100 billion in lost revenue this year, and affect the production of 3.9 million vehicles. Meanwhile carmakers scramble to establish direct relationships with producers or set up their own production. U.S. and European Union politicians promise tax credits or outright subsidies to bring back semiconductor factories and cease reliance on Asian makers. The recent G7 summit pledged to build an EU.-U.S. partnership to rebalance global semiconductor supply chains.
You know what assume stands for
“They (manufacturers) assumed that when production ramped back up, chip suppliers would accommodate them,” said Yu. (traditional chip suppliers) happily shifted manufacturing capacities to other sectors. Outside of automotive, many had increased orders at the beginning of the pandemic: home appliances, mobile phones, personal computers, and healthcare devices. Automotive is nowhere close to an important customer when compared to other tech giants. When there is a global shortage, the big get to eat first,” Yu said
“But Toyota stockpiled all the way through the pandemic. During the last financial crisis, Toyota has created a database that stores supply chain information for around 6,800 parts. Every day, every week, every month, Toyota communicates with thousands of suppliers at all levels. CFO Kenta Kon saw the complete transparency in the supply chain as part of the rescue system. This is how Toyota secured one to four months of stocks as necessary,” according to Yu.
GM and VW might not have been immune to the current crisis, but their huge scale and awareness of what is required suggests they will succeed in an electric and autonomous world. But many carmakers don’t have the spending power to compete.
“Automakers are fragmented compared with other global industries. Smart phone manufacturers, there’s about 3 or 4, home appliance makers about the same, but there are dozens of automakers many relatively unsuccessful so expect a lot of consolidation going forward,” Yu said.
When is this going to happen, over the next 10 years?
“Within 3 to 5 years, as active investors start asking companies about their autonomous driving or sustainability plans. This chip shortage up to maybe 2023 is only a symptom. It highlights to me those that have a clear idea of what they are doing. The winners will be those that capture the profitability of the industry, like NIO and BYD in China, and Tesla, and ones that have first class electric vehicle technology and autonomous global scale. Current management teams must take on the consequences, and many are reaching the situation where take-off or complete demise are the career options. That’s why nobody wants to be a car executive today,” Yu said.