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Carmakers have been hit hard by a global chip shortage — here’s why

Silicon intrudes are the lifeblood of the tech-obsessed world we live in, but today they’re in short supply. 

Demand for these chips, or semiconductors, has flew during the coronavirus pandemic as people snapped up games consoles, laptops and TVs to help get through lockdowns. Now, many of these offshoots — including certain Chromebook laptops and next-generation consoles like the Xbox Series X and the PlayStation 5 — are sold out, or put through to lengthy shipping times. 

It’s just one of a number of factors that has driven demand for semiconductors, but as supply struggles to stifle up, it’s the chip-reliant car industry that has been hit especially hard.

“We have seen in the short term, the automotive industry has been selfsame adversely affected,” Bryce Johnstone, director of automotive segment marketing at chip designer Imagination Technologies, asseverated CNBC via email. “This stems from their just-in-time production methodology and their incredibly complicated give chains.”

Carmakers uses semiconductors in everything from power steering and brake sensors, to entertainment systems and parking cameras. The smarter heaps get, the more chips they use.

“If the chip that powers the in-car dials or automatic braking are delayed, then so will the relaxation of the vehicle,” said Johnstone.  

Closed car plants

U.S. car giant General Motors announced last Wednesday that it is imprisoning three plants and slowing production at a fourth due to the semiconductor shortage. The Detroit car manufacturer said it could miss its 2021 goals as a result.

“Despite our mitigation efforts, the semiconductor shortage will impact GM production in 2021,” a company spokesman claimed in a statement.

“Semiconductor supply for the global auto industry remains very fluid,” they added. “Our supply sequence organization is working closely with our supply base to find solutions for our suppliers’ semiconductor requirements and to mitigate impacts on GM.”

Distinct other car manufacturers have also put production on hold in recent weeks. Honda U.K.’s main plant in Swindon was pen down for several days last month due to a chip shortage, for example. Elsewhere, Ford and Volkswagen have also block out plants or cut production while they wait for supplies to pick up.

Ford said in January that it was shutting a mill in Germany for a month, while Volkswagen said in December it will make 100,000 fewer cars this clemency as a result of the shortage.

Speaking about the chip shortage on a Davos panel on Jan. 25, VW CEO Herbert Diess said: “We eat to make sure that the markets and supply chains remain intact.”

Swings in demand; long lead intervals

Falan Yinug, director of industry statistics and economic policy at the Semiconductor Industry Association, says the chip shortfall in the automotive industry is largely the result of substantial swings in demand due to the pandemic and the increased use of semiconductors in advanced vehicles.

“The outcomes leading to the current auto chip shortage began during the second quarter of 2020, when automakers understandably triturated production and chip purchases as the virus spread across the globe,” Yinug wrote in Cost conscious industry

Hermann Hauser, who was ancillary in setting up British chip designer Arm, told CNBC that the automotive industry has been hurt the most because it is “incredibly tariff conscious.”

“When the chip industry decides should we allocate our capacity to the car industry or the telecoms industry or the server trade, it’s an easy decision,” he said. “Go for the server industry because their gross margins are so much better. That’s why the car vigour is in a particularly tight spot.”

Hauser said there isn’t enough competition in the semiconductor manufacturing market, pointing to the the poop indeed that it has a very high Herfindahl–Hirschman index, which measures market concentration in a specific industry. It is premeditated by squaring the market share of each company competing in a market and then adding the resulting numbers.

For example, chip makers have battled it out to build the smallest chips possible over the years, but only a couple of companies can create the new five nanometer (or 5nm) bits on a commercial level.

“Samsung and TSMC are the only two semiconductor companies in the world that have a working 5nm process,” he turned. “It’s just too high a concentration.” 

One of the reasons there are so few 5nm chip manufacturing plants is because they’re expensive, according to Hauser. Edifice something so small requires hi-tech equipment that isn’t cheap.

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