A shortage of chips
Evans discusses the ongoing global semiconductor issue and the impact it is having on North American vehicle demand.
One of the most vital items in our world today is the humble microchip. It’s used in everything from kitchen items like toasters, fridges and dishwashers to smartphones, tablets, TVs, cable and satellite recorders – and of course our cars. Since the Seventies, we’ve seen vehicles become more and more like computers on wheels. First it was breakerless ignition systems, then electronic feedback carburettors, fuel injection, ABS brakes, traction control, airbags, stability control – the list goes on.
In many cases, the modern vehicle can have more than 20 computer modules controlling everything from start-stop function, to air/fuel delivery to steering assistance, remote locking, power window operation, infotainment and telematics functions like onboard roadside assistance. Yet all these electronic functions – the vast majority of which have been driven by government mandates around safety – have meant a steady increase in the number of microchips required for each vehicle that leaves the production line.
And given that the vast majority of the world’s microchips today come from just two sources – Taiwan and South Korea – this presents a few problems. Firstly, that automakers are competing with the far broader market of consumer electronics for microchip demand and secondly, having just two major sources for microchip manufacture means that any disruptions in the supply chain can have very significant consequences.
Enter Covid-19. When the pandemic struck last year, many OEMs found themselves temporarily shutting down vehicle production and cutting back orders for components, including semiconductor chips. First, it began in Asia, and as the virus spread westward, then Europe and North America. On this side of the Atlantic, domestic automakers like Ford, General Motors and Chrysler (Stellantis) felt the impact of production slowdowns and now are feeling the impact of the current microchip shortage, due to projections made in March and April last year.
Ford has temporarily idled several of its plants that produce popular models including Chicago Assembly which builds the Explorer SUV, Kansas City which assembles the F-150 and US version of the Transit, as well as Oakville, which builds the Ford Edge and Lincoln Nautilus CUVs. Other plants, including Dearborn Assembly – which also produces F-150s – continue to operate, but demand for Ford’s most popular models remains limited. Over at General Motors, several assembly plants across North America have been idled in recent months including Lansing Delta, Michigan and Spring Hill, Tennessee and while the four factories that build its highly profitable full-size Silverado and Sierra pick-ups as well as the big Tahoe, Yukon and Escalade SUVs are still operating, if the shortage continues for much longer, there could also be disruption here as well.
Chrysler (Stellantis) has announced suspension of Jeep Grand Cherokee and Dodge Durango production at least through May at the Jefferson North plant in Detroit, as a result of the chip shortage. And the situation is not confined to US automakers; globally, in both Europe and Asia, OEMs are facing similar problems. While there has been news circulating that semiconductor manufacturing is being stepped up, it could be months before automakers see a return to normal production levels, possibly into 2022.
Besides the semiconductor shortage, the auto industry in North America is also coping with high demand and high prices for just about every single vehicle out there. The shortage of new vehicles has significantly pushed up the price of used vehicles, meaning that dealers are making healthy profits on the used vehicles they are able to source. Yet sourcing them is becoming a problem. The auctions are dry and even trade-ins that used to be wholesaled are now being retained by dealers, being refurbished and then retailed – and they are selling fast and often well above asking. In fact, the demand for reconditioning work is such that many collision centres, which have seen their traditional insurance work fizzle, are making a tidy profit in doing recon work for dealers.
How it will pan out ultimately remains to be seen, but given that many people are still stuck at home and have nothing to spend their money on, this pent-up demand, combined with a shortage of vehicles in the market for the foreseeable future, could lead to a strong seller’s market, especially once economies start properly opening up. If that happens it could result in a seller’s market, the likes of which we haven’t seen since the years following the Second World War. And, given that in North America, the auto sector is 9-1 job multiplier, an unprecedented pandemic could lead to an era of unprecedented economic growth and prosperity, the likes of which many of us have not seen in our lifetime.