The semiconductor crisis will persist. How can the Automotive Industry tackle it?
As our experts predicted in 2021, the crisis related to microchips and other semiconductors was not solved in the short term. In this new insight, we explore the possibilities of navigating the crisis.
As The Logistics World recalls, during the early days of the covid-19 pandemic, the headlines of specialized media in the Automotive Industry focused on the huge drop in demand for vehicles.
However, for more than a year after that, concerns have shifted to the supply side.
Although vehicle orders have risen to unexpected levels, the microchip shortage has turned into a semiconductor crisis.
Automakers and other original equipment manufacturers (OEMs) got really close to interrupt production lines or remove some popular features from their offerings, such as heated seats.
A neglected problem, consumer goods vs. automotive products, and market potential
In 2021, we discussed how the semiconductor crisis is not the result of the pandemic: one of the leaders of microchip manufacturers, Intel, was showing signs of problems related to supply due to changes in its manufacturing process since 2019.
When the global consumption of household electronics burst, the problems became a crisis in the medium to long term.
An analysis by consulting firm McKinsey, based on a series of macroeconomic assumptions, reveals that semiconductor markets have experienced sales growth of more than 20 percent, reaching about $600 billion in 2021.
McKinsey suggests that the sector's aggregate annual growth could average 6 to 8 percent annually through 2030. "The fastest growing segment will likely be the automotive, where demand could triple, driven by applications such as autonomous driving and electric mobility [e-mobility]," the study reports.
However, while demand increases, supply has not kept up with the growth potential.
After the pandemic, other situations have aggravated the semiconductor crisis:
·?Freight transport costs
·?Lack of critical components
·?Russia's war against Ukraine
·?Belligerent tensions between China, Taiwan and the United States
We’ll start commenting on the last point.
A conflict between China and Taiwan could mortally wound the microchip industry
As Jason Hsu, a former Taiwanese legislator and current Harvard Fellow, illustrated in the New York Times, Taiwan remained in the eye of the storm in war tensions with China and U.S. interests.
According to motor.es, Taiwan accounts for more than 65% of ?global chip production worldwide. Two local companies stand out:
In an interview with CNN, Mark Liu, CEO of TSMC, warned that the company would be forced to paralyze its factories in the event of an armed conflict with China – and the situation would be like pouring more gasoline on the fire of the semiconductor crisis.
"Technology companies on both sides of the Pacific now rely heavily on TSMC to create the high-performance chips that render graphics in video games and give smartphones their intelligence, but also guide missiles and analyze oceans of military data. That has made TSMC, whose name is obscure to most consumers, a vital strategic asset for both Washington and Beijing”, signs the NY Times. “Sometimes the place that seems to be the most dangerous can actually be the safest," Jason Hsu concluded.
The semiconductor crisis also tries to deflect from the bullets between Russia and Ukraine
An assessment published by KPMG indicates that the most immediate risk of negative impact of Russia's war against Ukraine is related to the supply of specific raw materials used in the manufacture of semiconductors, such as neon and palladium.
Using its own sources, KPMG reports that Ukraine produces about 70% of the world's neon supply, and Russia produces about 40% of the world's palladium supply.
Between 45% and 54% of the world's semiconductor-grade neon — critical for lasers used to make chips — comes from two Ukrainian companies, Ingas and Cryoin, according to Reuters calculations based on Techcet data. Global consumption of neon for chip production reached about 540 metric tons last year, Techcet estimates.
On the other hand, the website Politico argues that microchips can force Russia to withdraw from the war, because months after its invasion of Ukraine, the country led by Vladimir Putin "is being strangled by a serious technological deficit inflicted by sanctions."
North America unites to offer alternatives
Most companies affected by the semiconductor crisis are in the United States. Joe Biden's administration has been developing a nearshoring plan for the production of microchips for months, which includes the participation of Mexico.
The initiative is led by a bill called Creating Useful Incentives for Semiconductor Production for America (CHIPS), also known as 'CHIPS-Plus.'
Passed in the U. S. Senate in July of this year, the bill seeks to "foster local computer chip manufacturing in the United States, create good-paying jobs in the country, and address supply chain vulnerabilities in these critical technologies, allocating $52 billion for semiconductor research, design, and manufacturing."
The figure is roughly equivalent to Panama's Gross Domestic Product (GDP) in 2021.
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The Chinese government views with apprehension the way in which the CHIPS-Plus plan has been communicated.
At a press conference in Beijing in March, Chinese Foreign Ministry spokesman Wang Wenbin said the bill "promotes China's threat theory." "The United States should work to maintain the stability of global industrial supply chains, including in the semiconductor industry, rather than creating problems with China and viewing the country as an imaginary enemy," Bloomberg reports.
What can our experts say about the next chapters in the semiconductor crisis?
In 2021, the director of EP America’s and Europartners Group's AutoMobility vertical, Alex Katsouris , correctly predicted that the semiconductor crisis would linger beyond 2022.
Now, Alex Katsouris says that "the shortage of chips in the automotive supply chain continues and it is projected to continue in 2023, due to demand for delayed orders of cars throughout 2022."
And is there a light at the end of the crisis tunnel? "Yes, if microchip manufacturers can distribute their production in a more objective way to OEMs," Katsouris says.
On the one hand, OEMs and their respective Tiers have been working together to redesign products, creating more intelligent central boards that can decrease by up to 50% and the number of chips needed for any vehicle.
On the other hand, the production of OEMs and Tiers is quite irregular, with significant ups and downs – a great challenge for all manufacturing materials and components.
"The automotive industry is experiencing an intense ‘start-stop’ production pace: demand is changing from very high to very low in very short periods of time," explains Alexander Katsouris.
The director of our AutoMobility vertical lists some of the results of such a frenetic dynamic. OEMs and Tiers today are facing:
·????????????????????inconsistencies in the quality of production;
·????????????????????more orders to speed up processes and deliver product (vehicles finishing) to market as quickly as possible;
·????????????????????an increased number of air freight and critical cargo services to avoid or address supply chain disruptions.
The semiconductor crisis requires a strategic management of solid alternatives for the logistics chain
Gabriela Quevedo , leader of the AutoMobility vertical at Expedited América do Brasil – Europartners Group's brand in the South American country – suggests three lines of action to mitigate the risks of line shutdown resulting from the semiconductor crisis:
Strengthen just-in-time supply chains with just-in-case material reserves
Suppliers at all levels of the automotive supply chain are affected by the semiconductor crisis. Therefore, companies that adopt just-in-time production models must strengthen the security of their logistics chain with a just-in-case plan, that is, a stock reserve to mitigate the risk of a line stoppage.?
Plan in detail the short-term logistics and modus operandi in case of critical cargo
A year after the semiconductor crisis, no one expected a war in Ukraine and the unfortunate consequences for both the population and the global supply chain. We also don't know what the future holds, but we can muster resources to plan each quarter accurately.
In addition to planning in detail each nearby shipment – considering the best options for cargo volume and project lead time – it is also important to have the critical cargo service alternatives available on hand.
What must you do if the plan fails?
Of course, we don't plan disruptions in the supply chain – but that doesn't mean they won't happen. Who could predict a pandemic or a war? But this really happened, and we need to have a plan B at hand, even if it is not used.
To build a Plan B, it is necessary to be aware that all the previous steps of the process failed for some reason and now we must minimize the impacts of an eventual rupture.
Strengthening the relationship with your logistics partner is the best way to mitigate the risks of an emergency operation. That partner will be following the movements of the market and will be able to provide you with alternatives that meet the needs of that specific demand.
Why should you partner with EP America to tackle the semiconductor crisis?
At EP America, a company of Europartners Group, we work to be more than a freight forwarder: we want to be a strategic partner in logistics for our customers in specialized industries.
Having a strategic partner in logistics gives you the possibility of having at hand a solid portfolio of premium services that can be combined to build a plan tailored to your needs, relying on the expertise of specialized and experienced teams in your industry.
OEMs and Tiers of the Automotive Sector, for example, have the specialized services of our AutoMobility vertical.
Regardless of your industry, after an initial consultation, we begin to learn your most specific requirements, develop a diagnosis and offer "white glove" service options.
We are extremely sensitive to your delivery times and the high value of your cargo, offering uninterrupted follow-up and total visibility, offering mainly premium air services, but also with the ability to put together multimodal plans tailored to your needs.
Contact us today to design a customized plan!