How Covid led to a $60 billion global chip shortage for automakers

This photo shows Ford 2018 and 2019 F-150 trucks on the assembly line at the Ford Motor Company’s Rouge Complex on September 27, 2018 in Dearborn, Michigan.

Jeff Kowalsky | AFP | Getty Images

Automakers across the globe are expected to lose billions of dollars in earnings this year due to a shortage of semiconductor chips, a situation that’s expected to worsen as companies battle for supplies of the critical parts.

Consulting firm AlixPartners expects the shortage will cut $60.6 billion in revenue from the global automotive industry this year. That conservative estimate includes the entire supply chain — from dealers and automakers to large tier-1 suppliers and their smaller counterparts, according to Dan Hearsch, a managing director in the New York-based firm’s automotive and industrial practice.

“All the way up and down the supply chain, everybody is out some portion of money,” he said. “This could be 10% of global demand this year, its impact, which craters the recovery. We don’t think we’re overstating this.”

General Motors expects the chip shortage will cut its earnings by $1.5 billion to $2 billion this year. Ford Motor said the situation could lower its earnings by $1 billion to $2.5 billion in 2021. Honda Motor and Nissan Motor combined expect to sell 250,000 fewer cars through March due to the shortage.

‘Knife fight’

Semiconductor chips are extremely important components of new vehicles for areas like infotainment systems and more basic parts such as power steering and brakes. Depending on the vehicle and its options, experts say a vehicle could have hundreds of semiconductors. Higher-priced vehicles with advanced safety and infotainment systems have far more than a base model, including different types of chips.

Scrambling for chips

Automakers are scrambling to get supplies of the chips, which have extremely long lead times due to their complexity. The shortage is far down the supply chain, causing a ripple effect through the entire network.

Some automakers, like GM and Ford, have confirmed plans to partially build products and store them until supplies for the vehicles become available. Others have said they may look to directly purchase the parts from smaller suppliers, cutting out much of the current supply chain.

Research firm IHS Markit anticipates 672,000 fewer vehicles will be produced in the first quarter of 2021 due to the semiconductor shortage, including 250,000 units in the world’s largest vehicle market, China.

Although major semiconductor suppliers such as Taiwan-based Taiwan Semiconductor Manufacturing and United Microelectronics have announced investment plans to increase production capacities, IHS says such plans will do little to nothing to relieve the short-term shortage.

“Because the cause of these constraints is the result of increasing demand from OEMs and limited supply of semiconductors, it will not be resolved until both forces are aligned,” said Phil Amsrud, IHS Markit’s senior principal analyst for advanced driver-assistance systems, semiconductors and components.

How did we get here?

A close up image of a CPU socket and motherboard laying on the table.

Narumon Bowonkitwanchai | Moment | Getty Images

Much of the problem begins at the bottom of the supply chain involving “wafers.” The wafers are used with the small semiconductor to create a chip that’s then put into modules for things like steering, brakes and infotainment systems.

A 26-week lead time is needed to build the chips before they are installed in a vehicle, according to Hau Thai-Tang, Ford’s chief product platform and operations officer.

The origin of the shortage dates to early last year when Covid caused rolling shutdowns of vehicle assembly plants. As the facilities closed, the wafer and chip suppliers diverted the parts to other sectors such as consumer electronics, which weren’t expected to be as hurt by stay-at-home orders.

“Those chip manufacturers as well as wafer manufacturers started redeploying their capacity to like consumer electronics, which was growing because of people working from home and virtual working patterns,” Thai-Tang said during an investor conference last year. “Fast forward, if you add 26 weeks to when they made those decisions, the drop-off or the trough in the supply started to hit automotive the latter half of last year, going into Q1.”

But demand for new vehicles was more resilient than expected during the shutdowns, particularly by consumers, so the industry recovered far quicker than anyone expected. As that happened, chip suppliers were continuing to divert resources away from automotive, and they’re attempting to play catch-up with demand from the automotive industry.

“There’s no easy way out of this,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research. “Last year we knew that once they were able to flatten the curve and get safety protocols in place, they could return to production. That’s not the case now. We’ve got really long lead times and more and more demand on chips.”

– CNBC’s Lora Kolodny contributed to this article.