The global wide shortage of semiconductor devices utilized in the production of today’s more electronic-laden and intelligent automobiles has increased. We first alerted Supply Chain Matters readers to this condition in early January.

A litany of global manufacturer’s including Ford Motor, General Motors, Honda, Toyota, Volkswagen, and others are each indicating production disruption or cutbacks. What was characterized in January as constrained production output has moved to actual production suspensions for certain models.

automotive manufacturing

A rather interesting voice regarding the ongoing semiconductor shortage has come this week from the Electronic Components Industry Association (ECIA). This organization is made up of the leading electronic component manufacturers, their manufacturer representatives, and authorized distributors. ECIA members reportedly share a common goal of promoting and improving the business environment for the authorized sale of electronic components.

A position paper titled; The Automotive Semiconductor Shortage- An Accident Waiting to Happen? makes an argument regarding the current shortage as one of an auto industry practice in fostering:

..one of the leanest and most demanding supply chains in the world, especially for electronics. Just-in-time manufacturing works great in a steady state environment. As long as everyone’s production lines up and down the industrial food-chain are running smoothly, automotive equipment manufacturers are able to output products with minimal inventory and disruption. As procurement executives in these companies were driven to more and more aggressive cost-reduction goals, they pushed their teams to reduce middlemen and any type of buffers that could add incremental cost. Unfortunately, with long lead-time items like semiconductors, the accompanying supply chain cannot react instantaneously. Especially when there is competition for fab, foundry, assembly, and test resources.”

The paper goes on to note that the industry’s intense focus on cost optimization could and should have been balanced with a pragmatic view on the extreme cost of an idled auto production line. In essence, a shortage of a $2 microprocessor or $5 flash memory chip impacting the production of vehicle that retails for tens of thousands of dollars.

Accepting the notion that this organization is advocating that electronic distributors can better cushion supply fluctuations by stronger ties or leverage with semiconductor producers, there are other considerations that should be factored by automotive supply chain management teams.

From an industry context, the semiconductors utilized in autos today are described as high mix, low volume, because of the large variety of offered models.  Auto manufacturers tend to differentiate in today’s market with the electronics-based features they provide, arguing the difference from competitor models. Major auto chip designers have mostly outsourced production to Asian based fabs such as TSMC, Samsung and others. These are the same fabs producing chips for smartphones, Cloud servers and personal computers.

The ECIA notes in its latest industry update that while the major fabs have shifted major output production to smaller geometries, many, 300 mm wafers, they still run 200 mm fab lines which account for the bulk of chips utilized in autos. The problem is that product demand for 5G enabled smartphones, IoT enabled devices as well as higher tech and consumer electronic product demand has now constrained 200 mm fab capacity. With the average auto requiring from 50 to 150 semiconductor chips, chip producers seem to have placed more priority toward: “higher volume/higher profit margin” orders in an environment of constrained capacity.

 

What This Implies

What this implies for auto producers are indeed the year 2021 theme of supply management teams ensuring added supply network resiliency.

As we noted in a prior Supply Chain Matters commentary, the digital transformation of Lean practices require new definition and direction for just-in-time inventory management flows. In the “new normal” of Lean, information is constantly changing, and the flow of supply will be interrupted because of market, supply, or logistics network disruptions.

The rethinking of Lean now has to context added risk factors, including required service levels, existing, or changing supplier lead times, or known risks of potential disruption. Another consideration is more connected factories, where common supply needs such as semiconductor chips are common among multiple production facilities.

For the automotive industry itself, the current chip shortages are a wake-up call to the realities that high tech and semiconductor components are not the same as machine or other auto components. There are relatively long lead times, and the semiconductor industry plans capacity in multiple-year time horizons.

The argument for utilizing an electronic distributor-based procurement model is really one of hedging known supply risk. It is a strategy option for managing resiliency of supply.

As we have noted in other industry-specific predictions related to the automotive industry, there is the reality that automotive, high tech and consumer electronics manufacturers increasingly must rely on the same global supply network. That same network is now subject to capacity constraints as well as growing geo-political tensions.  The latter includes the threat of a de-coupling of semiconductor supply networks and potentially added supply risk in certain geographic market sectors.

 

Bob Ferrari

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