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The Real Reason Behind the Automotive Industry IC Shortage — A Step-Function Surge in Demand!

Daniel Nenni

Admin
Staff member
After years of moderate increases, IC suppliers blindsided by automotive IC demand spike in 2021.

IC Insights has updated and released its comprehensive forecast and analysis of the worldwide semiconductor industry in its January Semiconductor Industry Flash Report, which is included as part of the 2022, 25th edition of The McClean Report service. Next month, the company will release the first of its four quarterly updates to the service. The February quarterly update will include, among numerous other topics, an in-depth analysis of the automotive IC market. An excerpt from this analysis is presented in this Research Bulletin.

The vast majority of the current headlines regarding the auto industry revolve around the semiconductor device shortage that began in earnest in 2021 and has carried over into 2022. The commonly accepted reason for this shortage is as follows:

In March of 2020, in the very early stages of the Covid-19 pandemic, auto demand plunged worldwide and automakers subsequently began to shut down plants and halt semiconductor orders from their suppliers. While this was happening, there was a surge in demand for cellphones, TVs, computers, games, and home appliances from a global population that was sheltering in place and increasingly working from home. As a result, semiconductor suppliers switched their production capacity away from automotive devices to devices that were being used in the other electronic systems that were in higher demand.

When the auto industry came back online in the latter half of 2020, it found that semiconductor suppliers, after having shifted production capacity away from automotive applications, couldn’t meet their renewed demand and a serious shortage ensued.

IC Insights believes that the above scenario is not the primary reason for the IC shortage now impacting the automotive industry. In IC Insights’ opinion, the real reason behind the automotive IC shortage lies in the surge in demand for automotive ICs in 2021 and not from the semiconductor suppliers’ inability to ramp up production. In fact, device suppliers shipped 30% more IC units to the automotive industry in 2021 as compared to 2020 (Figure 1), which was much greater than the 22% increase in total worldwide IC unit shipments last year. Moreover, 27% more IC units were shipped to the auto sector in 2021 as compared to the pre-pandemic year of 2019.

Motor Vehicle IC Shipment Trends 2011 2021.png
Figure 1

The 2021 jump in automotive IC unit shipments was by far the highest percentage increase since 2011, easily exceeding the 20% increase in auto IC shipments logged in 2017. As shown, the 52.4 billion in automotive IC shipments last year was 3x the 17.6 billion in auto IC shipments registered in 2011. In comparison, total worldwide shipments of ICs in 2021 (394 billion) were about 2x what they were in 2011 (194 billion).

In IC Insights’ opinion, the IC suppliers should be recognized for the amazing accomplishment of ramping up and supplying a tremendous amount of IC devices to the auto industry last year. However, when demand for ICs takes a “step-function” jump, as it did in the auto industry in 2021, there is bound to be a temporary mismatch in the supply/demand situation, which is really what is behind the shortage of IC devices in the automotive electronics industry.

Report Details: The 2022 McClean Report
The January Semiconductor Industry Flash Report to the 2022 edition of The McClean Report—A Complete Analysis and Forecast of the Semiconductor Industry, has been released with the 1Q Update scheduled to be released next month. A subscription to The McClean Report service includes the January Semiconductor Industry Flash Report, which provides clients with IC Insights’ initial overview and forecast of the semiconductor industry for this year through 2026. In addition, Quarterly Updates to the report will be released in February, May, August, and November of this year. An individual user license to the 2022 edition of The McClean Report is available for $5,390 and a multi-user worldwide corporate license is available for $8,590. The Internet access password and the information accessible to download will be available through November 2022.

https://www.icinsights.com/services/mcclean-report/pricing-order-forms/

More Information Contact
For more information regarding this Research Bulletin, please contact Bill McClean, President at IC Insights. Phone: +1-480-348-1133 email: bill@icinsights.com

PDF Version of This Bulletin
A PDF version of this Research Bulletin can be downloaded from our website at https://www.icinsights.com/news/bulletins/
 

Daniel Nenni

Admin
Staff member
Reason #1 Orders were cancelled and fab utilization dropped in 2019 and 2020.

Reason #2 Double and triple ordering as companies build inventories and move from Just in Time to Just in Case inventory management. Profiteering also happened in the supply chain as chip prices jumped.
 

jms_embedded

Active member
Reason #3 Automotive content has been increasing with a CAGR greater than the semiconductor industry as a whole. (It's in a few of IC Insights research bulletins over the last 5 years or so, and a number of the automotive IC manufacturers' earnings/investor presentations)

TI just had their 2021Q4 earnings call today, and here are two of the highlights that I noted:

Vivek Arya: Yes. Thank you, Dave. So the other question is now on the supply side. There is an
investor concern that the semiconductor industry is over investing at a time when
demand might be peaking. And I know you guys have made it clear that you invest for
the longer-term. But how are you thinking about your current acceleration on the
investment side? When does that translate into actual useful capacity? And what are
you doing to make sure that you don't over invest, right, at least in the next couple of
quarters?

Rafael Lizardi: Yes. Vivek, I'll go ahead and take that. As you alluded to at the beginning of the
question, we think of the long-term when we make this decision. So this is not about
2021, 2022 or even 2023. This is over the long-term. And the secular trends in our
industry, we're confident of where those are pointing and specifically, in our products,
analog and embedded, and the end markets that -- where we put a strategic priority
industrial automotive. So on the manufacturing investments that you alluded to, we're
very excited about those.

...

Ross Seymore: Yeah. I just wanted to pivot back to the revenue side. And whether it's industrial or
automotive, your two focused markets, they look like they both grew kind of 30%, 35%
year-over-year in 2021 as a whole. That's significantly faster than the secular growth
rate that you guys have delivered, but not terribly different than the peer group for the
year. So I just wondered how do you guys explain that level of growth. You don't seem to
see any inventory anywhere. The end markets don't seem to be growing that fast. But
whether it's for TI specific or the group as a whole, I wonder -- the sector as a whole, I
wonder how you would explain that growth and the sustainability of it?

Dave Pahl: Yeah. So I think that it's clear, as we look at those markets over time, we believe that
there's going to be content growth. So let me just talk about the long-term prospects of
both of those markets. So it's very easily seen in the automotive market that there's
content growth. We can see the cars today just have more semi content in them per
vehicle than what we drove five years ago and 10 years ago. And it's very clear that,
that's going to continue.

That same phenomenon, it's just a lot harder to see, is going on in the industrial market,
and that's what we love about it. It's not one thing we've got 13 sectors that make up that
market. We have hundreds of end equipments that we're working on and tens of
thousands of customers that we're working for. And our product portfolio is just
positioned perfectly for that. So it's really a strategic focus that's on it.

Now is there going to be noise around growth rates in any one given year? And John
pointed out with SIA data, the stuff bouncing around, that's going to happen, but we're
going to put in place growth and capacity to support that growth for the long-term. And
it's because we've got the confidence that those markets are going to grow and those
secular trends are going to continue.
 

Andy1299

Member
Reason #1 Orders were cancelled and fab utilization dropped in 2019 and 2020.

Reason #2 Double and triple ordering as companies build inventories and move from Just in Time to Just in Case inventory management. This (profiteering) also happened in the supply chain as chip prices jumped.
I had a slightly different read on reason 2: they shipped (vs. ordered) 30% more units in 21 then 20 or 19 and still couldn’t produce the cars. Seems like semi content demand or car demand really has had a step function increase in 21.
 

Andy1299

Member
Also auto companies build car “platforms” on a 5 year refresh cycle many of them bunch togther and Tesla (and others) have been causing them to up their game electronics wise since 2015-2017 AUtomonus driving hype
 

hist78

Well-known member
And possible reason #4, Automotive industry is too cheap on chips. They assume semiconductor industry is obligated to supply chips based on old old process nodes, such as 40, 65, 110, 130, 150, 160, 180, 250, and 800nm.

See the just released US Commerce Department report in another thread I posted:

 

hist78

Well-known member
Reason #3 Automotive content has been increasing with a CAGR greater than the semiconductor industry as a whole. (It's in a few of IC Insights research bulletins over the last 5 years or so, and a number of the automotive IC manufacturers' earnings/investor presentations)

TI just had their 2021Q4 earnings call today, and here are two of the highlights that I noted:



...
In a recent earnings conference call, TSMC also talked about the potential revenue growth due to the content increase in the end user devices, such as cars. It will be interesting to see what exactly the type of semiconductor products will benefit from this trend.
 

jms_embedded

Active member
Automotive industry is too cheap on chips. They assume semiconductor industry is obligated to supply chips based on old old process nodes, such as 40, 65, 110, 130, 150, 160, 180, 250, and 800nm.
You assume that the automotive companies are driving this. (ha! pun not intended)
 

Daniel Nenni

Admin
Staff member
#3 is not a valid reason for the current shortage in my opinion. Yes chip content in cars is increasing but that is expected and forecasted. How long does it take to design a car? If car companies had ordered properly they would have had enough chips.
 

slin

New member
Car manufacturers thought they were being the badasses by cancelling chip orders back in 2020 when the pandemic started. Turns out the foundries were easily able to fill the void by finding orders from other industries and the car makers soon realized they were the ones who got chopped from the kneecaps; and this was largely due to their own doings.
 

hist78

Well-known member
Car manufacturers thought they were being the badasses by cancelling chip orders back in 2020 when the pandemic started. Turns out the foundries were easily able to fill the void by finding orders from other industries and the car makers soon realized they were the ones who got chopped from the kneecaps; and this was largely due to their own doings.
It's true for 2020 auto makers screwed themselves up by canceling orders. But why auto makers were still complaining in 2021 while major foundries already produced more for them?

Isn't that strange?
 

Daniel Nenni

Admin
Staff member
It's true for 2020 auto makers screwed themselves up by canceling orders. But why auto makers were still complaining in 2021 while major foundries already produced more for them?

Isn't that strange?

I think it's a combination of things. Getting the wafers is one thing, getting them packaged up, tested, and put in the cars during COVID is quite another. Lot's of people touch those automotive chips and those people want to be paid extra for their heroic pandemic efforts. It's called profiteering.

I'm not experienced with the automotive supply chain but I have been on calls with people who are and it's a complete mess. My guess is that you will see a complete overhaul of the automotive supply chain starting with car companies making their own chips and having better control in getting them to the factories.
 

jms_embedded

Active member
Daniel/hist78/slin: There's a lot of shade being thrown here at the automotive companies and their suppliers, and I guess it's deserving if these various claims are true, but I don't see anyone pointing to verifiable facts. Are you 99-100% certain, or is this a conjecture based on some assumptions you are making?

And possible reason #4, Automotive industry is too cheap on chips. They assume semiconductor industry is obligated to supply chips based on old old process nodes, such as 40, 65, 110, 130, 150, 160, 180, 250, and 800nm.

Do you have any evidence that the auto industry is "cheap" (not willing to pay for something that would save them money in the long term) and they "assume semiconductor industry is obligated to supply chips... on old process nodes"?

800nm was specifically cited in the Commerce report as analog. The cost-per-transistor advantages for digital circuits don't apply here; you can't take an op-amp or a power circuit and shrink it without giving up something. Power needs area for thermal dissipation / ability to conduct high currents; op-amps and other linear analog circuits need area for precision. And even if you could make them smaller (use smaller opamps with worse offset voltage and calibrate them digitally with tiny digital circuitry that benefits from Moore's Law), the cost savings don't come through to jump from 800nm to, say, 90nm. With digital transistors, you could stick 80x as many transistors with an 800 -> 90nm shrink for the same silicon area, but I don't see the market for an array of 80 op-amps in one package, and if you take one op-amp and make it 80x smaller in area, even if you could make it smaller without losing significant precision, then the chip cost would be dominated by the package, and you wouldn't get an 80x decrease in price, or even a 5x decrease in price.

I would be inclined to believe that the automakers are buying subsystems from the Tier 1 suppliers who buy the chips from the semiconductor manufacturers, and these manufacturers have done the ROI to determine the process geometry for each design that gives them the most profit. Otherwise a competitor could jump in with a cheaper component and steal their business away.

#3 is not a valid reason for the current shortage in my opinion. Yes chip content in cars is increasing but that is expected and forecasted. How long does it take to design a car? If car companies had ordered properly they would have had enough chips.
Toyota weathered the shortage better than other companies (Fukushima in 2011 prepared them) but the chip shortage is going on and on and they're not immune from the issue (see recent Reuters article).

"had ordered properly" -- and what would have been the proper way to handle the situation?

Put yourself in the shoes of some automotive executive who gets to make production decisions back in March 2020:

- You've had two bad years already, 2018-2019.
- It's early March 2020 and this COVID pandemic is spreading like wildfire, orders from customers are dropping like rocks as lockdowns/fear takes its toll and people aren't interested in a new car
- Your gross margins aren't great anyway because it's a cutthroat manufacturing business; Ford's gross margin was hovering around 15% before 2020 and decreasing
- The car rental companies are a few of your big customers, and they're not ordering anything. They're making negative capital expenditures (selling chunks of their fleets) because they're desperate to stay afloat. Some didn't: Hertz declared bankruptcy in May 2020.
- You have no idea how long this is going to last.

What do you do?

And what do your suppliers do? Auto companies place orders with Tier 1s who place orders with automotive IC manufacturers, some of whom place orders from foundries like TSMC. Bullwhip effect magnifies the uncertainty through the supply chain. Do you call up the IC manufacturers and tell them "See, I have this problem, I don't think I can afford to place as many orders this quarter with my suppliers, and that means that you probably won't be getting orders from the Tier 1s... but I might need those chips after all, so could you please just kind of set them aside for our future needs? I can't pay you anything right now but it would be a big favor."

It's a big mess, and I don't doubt that the cost-benefit analyses of choosing "just-in-time" to reduce inventory was a poor choice and did not allow for rare risks. So I guess they could have kept more inventory (like Toyota apparently did) earlier back in 2018-2019, then when COVID hit, reduce new orders and rely on inventory.... or would the proper order be to anticipate the future, that COVID was a brief disruption and keep on cranking out cars even though their customer demand dropped? What happens at the executive staff meetings when the CEO asks them why they're doing this, they're going to get hammered at the board meetings and the stock market for building up a bunch of inventory on their balance sheets?

I'm inclined to believe that for the most part they made decisions that they believed were optimal given the information they had at the time. Maybe they made a few minor errors here and there. I don't know the right answer and I'm sure I've made multiple errors in what I've just written, but I'm not about to second-guess that the auto industry as a whole all came to the same suboptimal conclusions.
 

Daniel Nenni

Admin
Staff member
Daniel/hist78/slin: There's a lot of shade being thrown here at the automotive companies and their suppliers, and I guess it's deserving if these various claims are true, but I don't see anyone pointing to verifiable facts. Are you 99-100% certain, or is this a conjecture based on some assumptions you are making?

The problem I have with this whole situation is the narrative. The auto companies are blaming the chip shortage for their losses when THEY in fact caused the chip shortage. Granted COVID completely messed up the worlds supply chain for many different products but why blame the semiconductor industry? When there was a toilet paper shortage did we blame the lumber jacks? Blame COVID if you want but do not blame the hard working semiconductor people.

TSMC for example, TSMC builds to order. It's the perfect business model. Order your chips on this date and we will deliver them on this date. Cancel those orders and there is no guarantee when we can get those chips to you. Simple as that. The auto companies could have taken inventory instead they cancelled the orders. Bad management decision.

Now TSMC can easily say their manufacturing is tight but they are not on allocation so there are plenty of wafers to go around. But if your manufacturing utilization is tight you can raise your prices to weed out the excess inventory builders. TSMC can also build out capacity with impunity, which they are doing with a record $44B CAPEX.

But don't worry this is all good news. In 3-5 years we will have excess semiconductor manufacturing capacity so prices will come down and that will enable a much broader use of electronic devices, as history has shown. Unlike other industries, the semiconductor industry keeps innovating and brining more value to end customers. That is our jam and it will continue no matter how Moore's Law is misinterpreted, absolutely.
 

slin

New member
Daniel/hist78/slin: There's a lot of shade being thrown here at the automotive companies and their suppliers, and I guess it's deserving if these various claims are true, but I don't see anyone pointing to verifiable facts. Are you 99-100% certain, or is this a conjecture based on some assumptions you are making?

A pertinent article: https://www.reuters.com/article/us-...rder-as-chip-crunch-intensifies-idUSKBN2AJ0LD

"That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery."

Biggest problem with car manufacturers is that they're so used to just-in-time delivery of parts from suppliers and they keep little or no inventory. You just can't have that with chips that takes 6 months to produce. With how much it costs to build fabs these days they would ideally like to keep them churning and that's what happened in 2020.
 

hkwint

Active member
The problem I have with this whole situation is the narrative. The auto companies are blaming the chip shortage for their losses when THEY in fact caused the chip shortage. Granted COVID completely messed up the worlds supply chain for many different products but why blame the semiconductor industry? When there was a toilet paper shortage did we blame the lumber jacks? Blame COVID if you want but do not blame the hard working semiconductor people.

This is where you make an interesting logic flaw:

Blaming the "Chip shortage" is not the same as blaming the people who work in the semiconductor business!

For example, in answer to "I'm not experienced with the automotive supply chain but I have been on calls with people who are and it's a complete mess." --> How it actually happens:

One day, they can´t make cars because there are no semiconductors. Next day, semiconductors arrive but there are COVID-cases in the factory, and some shifts have to stay home. Next week, workers arrived, but there's no rims due to the magnesium shortage. Next week there's a shortage of plastic blisters; meaning no transport. Next week, there's no metal because traffic in the Suez is stuck. Next week, people report ill because side effects of vaccination. Next week, travel opens up again so all employees decide to take holiday in the same week. Next week, everything is in order but now there's a shortage of semiconductors - again. Next week, production is flooded (also actually happened).

So, internally, nobody is complaining about 'the hardworking semiconductor people". In fact, most of the automotive world has production locations in Asia. So they are fully aware of the dire situation for the workers in Vietnam and Malaysia, no matter in which industry. The media outlets and politicians however, that's a whole different thing. Of the 10 issues why planning is a complete mess, only 1 got serious attention.

Now here's the thing: These automotive companies are on a EBIT-margin of ~2% in 2020 (a typical actual figure BTW).
They don't have the luxury position where they can order and put in stock and pay whatever they want to "outbuy" the competition because they have EBIT margin of ~30%, like Apple.

And all that mess is happening right after the huge (self inflicted, I agree) writedowns in Diesel technology; already causing a tectonic shift in these companies, usually also not reported in the media. Which goes together with cancellation of almost all investment in ICE locations. So there you have it, huge savings to be made in 2019, the largest transformation ever and then COVID happens.

So for automotive companies, stock levels (depreciation 10% yr / value) could actually be the difference between profit or loss. It's not because they're a bunch of cheapskates, it's a matter of having to fire or not fire people who have a house, a life and maybe a family too.

What happens is as a company, you have a target of reducing spare parts. It's a continuous fight between the accountants (who want to cancel almost all stock), and the people (usually engineers) who actually know the risk of when a part is not in stock, and then that part is needed. Stock parts / locations are cancelled, or you're not allowed to put a certain part in stock. Then something breaks, and guess what: Companies like Siemens, SICK or NVidia can't deliver your parts because, hey, semiconductor shortage. Never reaches the news. A week ago somebody went on bicycle to fetch a part, which was out of stock (at least 3 months), but which somebody else luckily had laying in the basement.

And it't not only the automotive sector, also GPU's. A big amount of ABF manufacturirng facilities worldwide literally went up in smoke; and customers are complaining. Also there, you see Intel and NVidia outbuying AMD, when it comes to existing / new ABF capacity.

But nobody accuses those companies of blaming hardworking semiconductor people, only the automotive sector is blamed. Ask somebody on the internet why they can't buy a car, and the will tell you it's semiconductors. Ask them why you can't buy a GPU, and they'll probably either don't know, or blame TSMC for "Not having enough 7nm capacity". ABF, leadfrimes, VRM's: All things foreign to them.

So if you properly analyze it, the companies who have low margins because they operate in a sector with competition, they can´t compete on semiconductor buying-power with the companies who operate in "high-margin / patent protected network effect / convicted monopolist sectors"

That's true if you compare the automotive sector to for example Apple.
Or if you compare a company like Ford to Tesla (10% EBIT margin).
Or (for ABF) if you compare AMD to Intel / NVidia.
Or (this is a nice one!) me, at the "custom metal parts" supplier, wanting to order some stuff, but then they don't have time next few months because ASML came along to say hi.

There you have it. The real root cause, is there's no level playing field between the buyers of semiconductors.
 
Last edited:

hist78

Well-known member
This is where you make an interesting logic flaw:

Blaming the "Chip shortage" is not the same as blaming the people who work in the semiconductor business!

For example, in answer to "I'm not experienced with the automotive supply chain but I have been on calls with people who are and it's a complete mess." --> How it actually happens:

One day, they can´t make cars because there are no semiconductors. Next day, semiconductors arrive but there are COVID-cases in the factory, and some shifts have to stay home. Next week, workers arrived, but there's no rims due to the magnesium shortage. Next week there's a shortage of plastic blisters; meaning no transport. Next week, there's no metal because traffic in the Suez is stuck. Next week, people report ill because side effects of vaccination. Next week, travel opens up again so all employees decide to take holiday in the same week. Next week, everything is in order but now there's a shortage of semiconductors - again. Next week, production is flooded (also actually happened).

So, internally, nobody is complaining about 'the hardworking semiconductor people". In fact, most of the automotive world has production locations in Asia. So they are fully aware of the dire situation for the workers in Vietnam and Malaysia, no matter in which industry. The media outlets and politicians however, that's a whole different thing. Of the 10 issues why planning is a complete mess, only 1 got serious attention.

Now here's the thing: These automotive companies are on a EBIT-margin of ~2% in 2020 (a typical actual figure BTW).
They don't have the luxury position where they can order and put in stock and pay whatever they want to "outbuy" the competition because they have EBIT margin of ~30%, like Apple.

And all that mess is happening right after the huge (self inflicted, I agree) writedowns in Diesel technology; already causing a tectonic shift in these companies, usually also not reported in the media. Which goes together with cancellation of almost all investment in ICE locations. So there you have it, huge savings to be made in 2019, the largest transformation ever and then COVID happens.

So for automotive companies, stock levels (depreciation 10% yr / value) could actually be the difference between profit or loss. It's not because they're a bunch of cheapskates, it's a matter of having to fire or not fire people who have a house, a life and maybe a family too.

What happens is as a company, you have a target of reducing spare parts. It's a continuous fight between the accountants (who want to cancel almost all stock), and the people (usually engineers) who actually know the risk of when a part is not in stock, and then that part is needed. Stock parts / locations are cancelled, or you're not allowed to put a certain part in stock. Then something breaks, and guess what: Companies like Siemens, SICK or NVidia can't deliver your parts because, hey, semiconductor shortage. Never reaches the news. A week ago somebody went on bicycle to fetch a part, which was out of stock (at least 3 months), but which somebody else luckily had laying in the basement.

And it't not only the automotive sector, also GPU's. A big amount of ABF manufacturirng facilities worldwide literally went up in smoke; and customers are complaining. Also there, you see Intel and NVidia outbuying AMD, when it comes to existing / new ABF capacity.

But nobody accuses those companies of blaming hardworking semiconductor people, only the automotive sector is blamed. Ask somebody on the internet why they can't buy a car, and the will tell you it's semiconductors. Ask them why you can't buy a GPU, and they'll probably either don't know, or blame TSMC for "Not having enough 7nm capacity". ABF, leadfrimes, VRM's: All things foreign to them.

So if you properly analyze it, the companies who have low margins because they operate in a sector with competition, they can´t compete on semiconductor buying-power with the companies who operate in "high-margin / patent protected network effect / convicted monopolist sectors"

That's true if you compare the automotive sector to for example Apple.
Or if you compare a company like Ford to Tesla (10% EBIT margin).
Or (for ABF) if you compare AMD to Intel / NVidia.
Or (this is a nice one!) me, at the "custom metal parts" supplier, wanting to order some stuff, but then they don't have time next few months because ASML came along to say hi.

There you have it. The real root cause, is there's no level playing field between the buyers of semiconductors.
"The real root cause, is there's no level playing field between the buyers of semiconductors."

If automobile industry can't afford to pay more and/or doesn't want to pay more for the semiconductor products they need, what options do they have?

Or they are doomed to extinction?
 

count

Well-known member
Legacy auto are the ones complaining, they are selling about the same number of cars as they were 2 years ago, and can't figure out why they can't get chips. But then you look at the broader market and 15% of the auto market is EV and they are sucking up the chips.
 

Daniel Nenni

Admin
Staff member
This is where you make an interesting logic flaw:

Blaming the "Chip shortage" is not the same as blaming the people who work in the semiconductor business!

For example, in answer to "I'm not experienced with the automotive supply chain but I have been on calls with people who are and it's a complete mess." --> How it actually happens:

One day, they can´t make cars because there are no semiconductors. Next day, semiconductors arrive but there are COVID-cases in the factory, and some shifts have to stay home. Next week, workers arrived, but there's no rims due to the magnesium shortage. Next week there's a shortage of plastic blisters; meaning no transport. Next week, there's no metal because traffic in the Suez is stuck. Next week, people report ill because side effects of vaccination. Next week, travel opens up again so all employees decide to take holiday in the same week. Next week, everything is in order but now there's a shortage of semiconductors - again. Next week, production is flooded (also actually happened).

So, internally, nobody is complaining about 'the hardworking semiconductor people". In fact, most of the automotive world has production locations in Asia. So they are fully aware of the dire situation for the workers in Vietnam and Malaysia, no matter in which industry. The media outlets and politicians however, that's a whole different thing. Of the 10 issues why planning is a complete mess, only 1 got serious attention.

Now here's the thing: These automotive companies are on a EBIT-margin of ~2% in 2020 (a typical actual figure BTW).
They don't have the luxury position where they can order and put in stock and pay whatever they want to "outbuy" the competition because they have EBIT margin of ~30%, like Apple.

And all that mess is happening right after the huge (self inflicted, I agree) writedowns in Diesel technology; already causing a tectonic shift in these companies, usually also not reported in the media. Which goes together with cancellation of almost all investment in ICE locations. So there you have it, huge savings to be made in 2019, the largest transformation ever and then COVID happens.

So for automotive companies, stock levels (depreciation 10% yr / value) could actually be the difference between profit or loss. It's not because they're a bunch of cheapskates, it's a matter of having to fire or not fire people who have a house, a life and maybe a family too.

What happens is as a company, you have a target of reducing spare parts. It's a continuous fight between the accountants (who want to cancel almost all stock), and the people (usually engineers) who actually know the risk of when a part is not in stock, and then that part is needed. Stock parts / locations are cancelled, or you're not allowed to put a certain part in stock. Then something breaks, and guess what: Companies like Siemens, SICK or NVidia can't deliver your parts because, hey, semiconductor shortage. Never reaches the news. A week ago somebody went on bicycle to fetch a part, which was out of stock (at least 3 months), but which somebody else luckily had laying in the basement.

And it't not only the automotive sector, also GPU's. A big amount of ABF manufacturirng facilities worldwide literally went up in smoke; and customers are complaining. Also there, you see Intel and NVidia outbuying AMD, when it comes to existing / new ABF capacity.

But nobody accuses those companies of blaming hardworking semiconductor people, only the automotive sector is blamed. Ask somebody on the internet why they can't buy a car, and the will tell you it's semiconductors. Ask them why you can't buy a GPU, and they'll probably either don't know, or blame TSMC for "Not having enough 7nm capacity". ABF, leadfrimes, VRM's: All things foreign to them.

So if you properly analyze it, the companies who have low margins because they operate in a sector with competition, they can´t compete on semiconductor buying-power with the companies who operate in "high-margin / patent protected network effect / convicted monopolist sectors"

That's true if you compare the automotive sector to for example Apple.
Or if you compare a company like Ford to Tesla (10% EBIT margin).
Or (for ABF) if you compare AMD to Intel / NVidia.

There you have it. The real root cause, is there's no level playing field between the buyers of semiconductors.

I agree, it's personal, it's not logic, it's emotion. Especially when the narrative is "We must build ICs in the USA" like that is going to solve the problem of automotive companies cancelling orders and coin miners buying up all the GPUs. But the US is going to throw billions of tax dollars at it anyway because cars are sitting unfinished due to the lack of semiconductors.

I'm looking for quotes from automotive executives on investor calls that say "sorry, we made a mistake, we cancelled orders and we shouldn't have" and I can't find one, it's always "we can't get chips, supply chain problems, etc..." which is finger pointing.

And there may also be a shortage of car customers as well but we will never know because there are no cars on the lots to find out. It's the perfect crime...

It is also interesting to note that there are a flood of new EV start-ups so the big automotive companies have a lot more to fear than a chip shortage.
 

benb

Active member
A pertinent article: https://www.reuters.com/article/us-...rder-as-chip-crunch-intensifies-idUSKBN2AJ0LD

"That complaint by the world’s No.2 volume carmaker cuts little ice with chipmakers, who say the auto industry is both quick to cancel orders in a slump and to demand investment in new production in a recovery."

Biggest problem with car manufacturers is that they're so used to just-in-time delivery of parts from suppliers and they keep little or no inventory. You just can't have that with chips that takes 6 months to produce. With how much it costs to build fabs these days they would ideally like to keep them churning and that's what happened in 2020.
Lots of insights here, I liked this one, then I thought for a second. Lead time is a symptom not a cause.

Cause is a lack of capa. Specifically, the capacity to meet demand of the part desired at the price and lead time desired.

So you have to pick one:

- Do I substitute another part?
- Do I pay more?
- Do I wait longer?

I get the sense though that after substituting, paying more, and waiting longer, there still is no light at the end of the tunnel. Something else is afoot.

Regardless of what that something is, and it can be hard to figure out, even if you have total visibility into all aspects of the supply chain, adding some excess capacity is the only thing that will bring relief. For sure. There is no other cure. More fabs are needed, right now.
 
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