Automakers are making decisions to secure new strategies and supply chain solutions that ensure sourcing viability into the future.
Transportation accounts for roughly 23% of global energy-related greenhouse gas emissions, according to the Intergovernmental Panel on Climate Change, with road transport accounting for 72 percent of that. To combat climate change, governments have enacted increasingly stringent emissions standards for light-duty vehicles such as passenger cars. While the sector has consistently met these stricter aspirations by continually improving ICE, vehicle aerodynamics, and tire technology, new legislation in some automotive markets may force a considerable shift.
The adoption of electric vehicles will be pioneered by Europe and China. Several governments plan to phase out the sale of fossil-fueled automobiles by 2040, and are enticing consumers to switch to electric vehicles with generous financial incentives. Despite these incentives, economic factors will remain the primary drivers of long-term EV adoption.
The fundamental concern is a lack of semiconductors. The issue has finally passed its climax, which occurred in the summer. The gradual normalization of the situation has been predicted by research businesses and managers since the beginning of the autumn. Difficulties are still foreseen through the end of the first half of 2022, albeit on a considerably lesser scale than in recent months.
Let’s talk with Supplyframe‘s CMO, Richard Barnett.
Why is there currently a bottleneck in the worldwide supply of semiconductors, and how long will it last?
A number of factors have converged since 2020 in what many would consider a “perfect storm” of challenges. Not only has COVID and its variants caused delays in the form of lockdowns and labor shortages, but rising demand for semiconductors in industries like automotive, consumer electronics, and IoT has led to an overabundance of demand and very limited supply.
It’s also important to keep in mind that semiconductor production is both costly and time-consuming. Even with billions of dollars of investment, it still takes upwards of 26 weeks to go from production to packaged chips. Our estimation, based on data from our DSI Network, is that relief won’t be in sight until the first half of 2023.
What are the long-term implications of the current supply/demand imbalance, and how can businesses best navigate them?
Beyond short-term delays and costly spot buys to accommodate sourcing needs, the long-term implications here reveal vulnerabilities and inefficiencies within current supply chains. A lack of visibility, focus on resiliency at the point of design, and poor risk mitigation are all things that have been discussed for years, but now we are faced with the consequences of ill-prepared supply chains.
Digital transformation across the electronics value chain was always a discussion to some extent, but now it has become an imperative for the industry. Businesses need to take a step back, acknowledge the gaps in their visibility, understand the need for outside-in intelligence, and realize that minor adjustments or small initiatives will no longer work in the long-term.
What strategies are the global auto companies using to maintain a supply chain?
Automotive executives are focused on preventing total production shutdowns at all costs, because this is where the largest costs are incurred. We’re seeing short-term solutions like GM removing their automatic start-stop systems from full-size pickups and SUVs, simply because the vehicles can’t leave the production line with those capabilities in light of the shortages.
General Motors CEO has gone on the record saying that they will make “substantial shifts” by “building direct relationships with manufacturers.” All of this leads to a renewed focus on collaboration and visibility in automotive supply chain, and that’s where industry leaders are focusing their efforts in the near-term.
How has the supply/demand imbalance increased the risk of counterfeit chips?
While counterfeit chips are nothing new, the current shortages are putting a lot of supply chains in a bind, and causing ill-advised panic or spot buying without first properly vetting the supplier. These types of components often enter the supply chain by targeting production lines that are in danger of shutting down due to complete lack of components.
This is less of an issue for large manufacturers that purchase directly from chip foundries. Counterfeit chips tend to become an issue when companies buy chips in smaller batches from distributors that exist downstream from the supplier.
An interesting thing to note here is that companies are fully aware of the potential for counterfeits, but without proper intelligence and insight into the stock of trusted suppliers, they often find themselves backed into a corner and make a risky decision for the sake of preventing a total production shutdown.
What needs to be done to remedy the current shortfall for the automotive industry?
Part of the reason the shortages are so severe is that automakers are purchasing from the same supply pool as everyone else. To an extent, manufacturers like Tesla were able to sidestep the shortages by designing their own chips and architecture, which provides two distinct benefits: a connection to the supply, and no need to share with competitors or other industries.
OEM and Tier 1 suppliers need to step back and rethink their product design and platform strategies. By investing more into proprietary architecture and closely working with their suppliers, they can secure exclusive access to chips.
We’re already seeing this kind of movement with the recent announcement from both Ford and GM that they intend to enter the semiconductor business. Ford is set to partner with semiconductor manufacturer GlobalFoundries, while GM has begun engaging with chip manufacturers like Qualcomm Inc. and NXP Semiconductors NV, to become more closely involved with the process and supply.
There’s no magic fix for the shortages, but automakers are making the intelligent decision to secure new strategies and supply chains that ensure sourcing viability into the future.
What’s the situation for raw material for batteries? Are there enough raw materials available to make the full transition to electric?
We’re seeing price increases from raw material suppliers, along with extending lead times and factories operating at full capacity. The supply chain for EV batteries is relatively new, compared to the traditional vehicle supply chain that has operated for decades.
Automakers are partnering with open extraction sites for key materials like Lithium and focusing on sustainable and ethical sourcing, but shortages and price increases are likely to continue impacting these supply chains as aggressive goals for EV rollout continue to come up against the reality of current challenges.
This can be mitigated with investments into sourcing battery materials, which were seeing to an extent, but much like semiconductors, the time to establish a new extraction site for something like lithium is substantial and won’t immediately fix dwindling supply issues.
What risks to the economy or industry are possible in the future?
Beyond the shortages, the ongoing battle with COVID variants like Omicron could result in a resurgence of factory shutdowns or delays. Labor shortages are also a concern, alongside geopolitical tensions between China and the U.S.
The takeaway here is that risk is ever-present, and that our existing levels of visibility, resiliency, and risk mitigation are not sufficient to withstand current or future challenges. Organizations across the electronics value chain should be prioritizing these capabilities first and foremost as we head into 2022.