With 1,400 semiconductors in a car, chip-makers get upper hand

A century after automakers showed the world the value of assembly-line manufacturing, a shortage of semiconductors is teaching the industry a painful new lesson in what it takes to build a car.

For most of its history, the industry has relied on a distinct approach to buying car parts, procuring components from suppliers right at the moment they're needed. It's referred to as just-in-time manufacturing and is designed to streamline production and eliminate the costs of keeping warehouses stocked with parts waiting to be used.

But the shortcomings of that system were made starkly clear this year as the automakers confronted a dearth of the chips they need to build advanced functions into their vehicles, and found themselves near the bottom of chipmakers' customer lists because of their just-in-time approach. That shortage is threatening to cut $110 billion in sales from the industry, and forcing auto manufacturers to overhaul the way they get the electronic components that have become critical to car design.

"Customers need to change," said Hassane ElKhoury, chief executive officer of ON Semiconductor Corp, which gets more than a third of its revenue from the automotive market. "That just-intime mindset doesn't work."

Semiconductor makers are demanding guaranteed, long-term orders rather than the shortterm flexibility the carmakers are used to. The chipmakers' assertiveness, even under pressure from lawmakers, underscores the rebalancing of power from the companies whose logos are on the cars to those that provide the advanced technology that runs them.

As these components play a bigger role in everything from in-car entertainment to selfdriving functions, chip manufacturers say they're willing to invest in expanding production to head off a repeat of shortages that have forced the industry to mothball factories and furlough workers—if the carmakers give them orders that can't be cancelled and commit to long-term agreements.

"Why would I have invested a single dollar when my customer can cancel within 30 days and it takes me two years to build capacity?" ElKhoury asked.

There are signs the industry is listening. A week before, Ford Motor Company CEO Jim Farley indicated a new willingness to reverse decades of outsourcing for parts.

"As the industry changes, we have to insource now, just like we in-sourced powertrains in the '20s and '30s," said Farley, who has shut down half his factories.

Automakers can no longer "assume the dominance of an 800-pound gorilla" in negotiations with chip companies and battery makers, said Mark Wakefield, head of the auto practice at consultancy AlixParters.

Pioneered by Toyota Motor Corp. in the 1960s, just-in-time strategy helped the industry organise a system for sourcing the 40,000 or so components that go into a modern vehicle, many of which can be made in a matter of days. But semiconductors—the heart of sensors, engine management and battery controllers, infotainment and eventually systems that will pilot vehicles—are created in a process that takes months.

Today's cars contain an average of 1,400 semiconductors—and that puts the chipmakers at an advantage.