In prior Supply Chain Matters commentaries focused on the automotive industry and its supply networks, we have focused on how the ongoing global wide shortage of needed automotive semiconductor logic devices and what that has implied for multiple automotive manufacturer’s bottom lines. The ongoing semiconductor device demand and supply availability imbalances continues to amount to billions of dollars of production and market impact.

We remain of the belief that this crisis will lead to the rethinking of existing semiconductor global supply sourcing, supply chain planning and manufacturing business processes.

We have provided readers with specific symptomatic examples, manifested in either company financial management reporting, company executive statements or ongoing industry developments that are all leading to what we sense as being the beginnings of structural new thinking.

Let’s review some of these developments.



Like other industries the ongoing COVID-19 pandemic has provided both significant and simultaneous market demand and supply network disruptions.

On the vehicle demand side, the early stages of the pandemic resulted in a severe drop-off in global vehicle demand as populations had to deal with the effects of business lock downs and shutdowns, causing demand levels to severely contract. Many brand owners, in-turn, had little choice but to cutback on production schedules and consequently, inventory orders for semiconductors and electronic assemblies from their Tier One suppliers.

Global semiconductor producers themselves encountered significant production challenges not only with the initial cutbacks in chip demand needs but also with experienced workers not able to commute to their manufacturing and chip assembly facilities because of high infection rates. In Taiwan, the global hub of semiconductor fabrication, ongoing water shortages and a series of natural disaster events hampered global output.

In mid-2020, significant populations being forced to work from home drove added demand peaks for new computers, printers and telecommunications devices. Additionally, demand for electronic medical devices soared as global healthcare networks marshalled for the need to be able to take care of far larger numbers of very sick and critically ill patients.

When demand for new vehicles began to bounce back, many automakers discovered that reverting back to their former ways of leaning on Tier One electronics suppliers had marginal effect because global semiconductor demand levels had consumed available global capacity. Further, the semiconductor devices utilized in autos are not as sophisticated or as profitable as those required for today’s smartphones, computers, telecommunications and server management needs.


Recent Developments

We have noted for readers that global automaker Toyota acquired first-hand supply network risk management learning from the 2011 Fukushima disaster when semiconductor supplier Renesas’s facilities were severely damaged. Since that time, the automaker’s supply chain resiliency and business continuity planning has included supplementary safety stock planning for semiconductor device needs. In February of this year, Bloomberg reported in a report titled: Toyota Broke Its Just-in-Time Rule for the Chip Shortage, that in contrast to the rest of the industry, the automaker was not expecting a shortfall of semiconductors.  In the company’s recent earnings briefing, Toyota’s CFO indicated that: “as part of its business continuity plans, Toyota- which makes more than 10 million cars a year- had secured ‘one to four months of stock if necessary’ for various components.”  Last week, The Wall Street Journal reported that in spite of that safety stock, and because of the prolonged global wide shortages of needed devices, the automaker had little choice but to now cut production volumes in Japan by 40 percent for the month of September. Global wide production ad previously been cut back.

Just after the reporting of electric vehicle icon Tesla Motors’s recent financial performance, CEO Elon Musk subsequently made specific mention of semiconductor suppliers Renesas and Bosch as being the most problematic in the ability for Tesla to be able to successfully meet sales and profitability needs because of the constraints in needed semiconductor devices. Reportedly this was the first time that the EV maker has specifically cited suppliers. What was important about this revelation was that both of these suppliers, along with NXP Semiconductor, also support a number of global automotive producers. Musk was additionally more direct in indicating that Tesla is still facing “extreme supply chain limitations.”

We have hinted that the ongoing supply crisis will lead to rethinking of planning, procurement and manufacturing practices. An example of that was manifested in Ford Motor’s recent decision to shift to a select make-to-order planning, manufacturing and finished goods strategy for certain models of vehicles.

Statements from semiconductor industry participants and stakeholders have indicated the ongoing global semiconductor shortage condition is not going away soon, with consensus perspectives pointed to the year 2022 at the earliest before added supply is evident. Major semiconductor fab producers such as TSMC and Samsung have indicated that they will allocate capacity or new facilities toward addressing the global shortage but that will require added time. Intel has become rather vocal in unveiling a bolder strategy to compete in broader semiconductor market opportunities.

Semiconductor suppliers have further shared their own perceptions of global auto industry participants in trying to transfer the industry’s just-in-time inventory and manufacturing planning techniques to tactical and longer-term semiconductor supply needs. Many high-tech companies have forms of strategic supply contracts with semiconductor firms while others such as Apple have taking responsibility for the actual design of semiconductor devices to better manage an overall supply management and inventory availability strategy. These are forms of supply network resiliency actions.


Latest and Likely More Pertinent Development

The latest and we believe most significant indicator that the auto industry is destined for changed supply sourcing and planning practices came from a reported exclusive interview Business Network CNBC conducted with Harald Kroeger, a member of Bosch’s management board which was titled: Bosch says the semiconductor supply chains in the car industry no longer work. Specifically, Kroeger told CNBC:

As a team, we need to sit together and ask, for the future operating system is there a better way to have longer lead times. I think what we need is more stock on some parts [of the supply chain] because some of those semiconductors need six months to be produced. You cannot run on a system [where] every two weeks you get an order. That doesn’t work.” He further indicated that while semiconductor supply chain issues have quietly been managed by auto makers in the past, now is the time for change.

Keep in-mind that Bosch has some bias and skin in the game, namely because the supplier has recently started production of its own semiconductor devices in a $1.2 billion fab production facility in Dresden, Germany.

As noted, up to now, it has been semiconductor suppliers themselves hinting to automakers that their planning and lead-time expectations were not realistic and that in order to move beyond the current shortfalls, longer-term planning and strategic supply contracts would be needed to assure adequate capacity. This is now one of the major Tier One suppliers openly questioning the industry’s existing planning and contracting processes.


Additional Supply Chain Matters Perspectives

This supply chain industry analyst is of the belief that beyond all of these headline developments are meaningful indications and ongoing realization that savvy global auto makers will indeed rethink and redefine their planning strategies related to all required electronic devices, including semiconductors.

Automakers and other vehicle manufacturers continue to plan for global-wide product demand and consequent product development strategies toward more electric and hybrid powered vehicles. There is increased realization that the overlap with high-tech and electronics supply networks implies adopting both longer-term strategic and supply network tactical sourcing, inventory planning and manufacturing capacity availability.

Automakers will further have to come to grips as to whether each manufacturer needs to foster a more direct relationship with key strategic semiconductor suppliers or continue reliance on designated Tier One suppliers for that relationship. This has always been a challenge for high-tech producers and during times of strategic supply shortfalls, high tech OEM’s have tended to take control the direct relationships with key semiconductor suppliers over that of contract manufacturers.

Indeed, this is an important crossroad for global automotive companies in realigning their planning for strategic supply management. How each of the major automotive companies approach this challenge will be a determinant of future supply chain resiliency.


Bob Ferrari

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