The onset of the COVID-19 Pandemic has placed an increasing amount of pressure on manufacturers to meet the demand of businesses. All industries have been impacted by manufacturing and supply chain issues but none more than the semiconductor or “chip” market as it is more commonly referenced.
The semiconductor shortage has impacted computing, consumer electronics, industrial electronics, wireless communications and, most notably, the automotive industry.
Origins of the chip shortage can be tied to the beginning of the pandemic when lockdowns slowed or stopped production completely. With lockdowns in place and increased time spent at home, consumer technology saw an increase in demand which placed an additional constraint on the supply of semiconductor chips.
As if the pandemic and lockdowns were not enough, severe winter weather forced domestic production of semiconductors to shut down, a fire in Japan’s Renesas plant where 1/3 of the world's car chips are produced and an ongoing trade war with China also hampered production. All these factors created a demand that was impossible to meet by suppliers.
According to Goldman Sachs, 169 industries have been impacted by the global chip shortage. The price of computers, computer accessories and smart devices increased 3.7% year-over-year. The rise in price of smartphones and smart devices such as the iPhone and iPad can also be attributed to the shortage in chips. Apple relies on third-party chips to drive display and audio functionality of their devices but with large margins on the sale of their devices, Apple will remain mostly unaffected by the shortage.
Other electronic companies such as Samsung and LG have been deeply impacted by the shortage. Televisions, household appliances, smartphones and other electronic devices offered by both companies have been susceptible to low stock, backorders and increased prices due to the inability to source chips. Additionally, both Microsoft and Sony have faced issues in fulfilling demand for their new consoles and accessories beyond the normal holiday season surge. Both companies have stated that the supply issues should be resolved by 2023 for gaming consoles and accessories.
While the consumer electronics market has been impacted, the automotive industry has taken the biggest hit financially from the chip shortage, which is estimated to have cost $210 billion in revenue for 2021, due to the 7.7 million vehicles that were unable to be produced.
During the initial stages of the pandemic, consumer demand fluctuated but the need for semiconductors never subsided as consumer habits have shifted more towards the purchase of goods. Over the course of the last two years, demand has steadily increased within the automotive industry as consumers have remained interested in the latest and greatest technology, thus requiring more advanced semiconductors when producing vehicles.
From a financial perspective, revenues in 2021 declined across the board for four of the largest automotive groups. Stellantis (Fiat-Chrysler / Peugeot-Citroen) saw a 14% decrease, Volkswagen only dropped 4% due to sales of their high-end brands (Audi / Porsche), Ford declined 5%, and GM saw the worst of it at a staggering 24% large in part due to limited inventory issues. As one of the few companies to remain unaffected by the shortage, Tesla has seen both increased production and profits, mainly because they use fewer chips and were able to adapt with substitutes when necessary.
While automakers are seeing a decrease in revenue, consumers are left absorbing the inflated costs with limited choices when it comes time to buy a vehicle, new or used. As of January 2022, the average cost of new and used vehicles has reached all-time highs at $47,000 and $28,000, respectively. With the used car market soaring, many consumers are leveraging their high-value used cars on trade-ins towards a new car, offsetting the rising costs. Affordable new and used cars are still available but are extremely limited due to automakers' lack in means of production and consumers' unwillingness to part with their current vehicles with the many uncertainties across the industry.
With all things considered, opinions differ in terms of when the industry will get back to “normal”. Automakers such as GM, Ford and Hyundai remain optimistic that the chip shortage will decrease in the second half of 2022 as they have seen improvements in production year-over-year with the supply chain improvements made throughout the pandemic. Chipmakers such as Infineon and NXP remain skeptical that the supply chain issues are over, citing the spread of new variants that would shut down production in China.
Despite differences in opinion, the pandemic has been a major wake-up call for the automotive industry and its key players throughout the supply chain. As we look ahead, both parties are heavily invested, both financially and strategically, in solving the supply chain issues and mitigating the chip shortage. Presenting a unified front, the automotive industry is poised for a strong comeback and consumers should remain optimistic for the future.
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