Following New US Chip Sanctions, Automakers Turn to Black Market

By Logan Wamsley

U.S. automakers officially may be at their breaking point. In a year that has seen raw material shortages, skyrocketing lead times, ongoing complications from stringent COVID-19 protocols, port congestion, and other major supply chain disruptions, the repercussions of the recent U.S. sanctions against the sale of chips and chip-making equipment to China are now pushing the automakers to make drastic, and potentially dangerous, supply chain decisions to maintain operations. Duch decisions include embracing the chip black market

“Recent U.S. sanctions have introduced another round of panic to the market and disturbed the supply of both entry-level and more advanced chips,” China Passenger Car Association Secretary General Cui Dongshu recently said. “Distribution channels and the prices of chips are messed up.”

The answer automakers have found, it seems, is entering into the black market of unauthorized chip component suppliers, which grew exponentially during the height COVID-19 pandemic. This market, populated by thousands of independent middlemen without proper authorizations or the ability to trace the chips in their possession, offers automakers and other OEMs the opportunity to purchase the inventory they need at markups that can run up to 500% of the original cost. Far from being new inventory, the majority of these chips are either secondhand, out of date, or counterfeit, all with no safeguards built in for the buyer making the purchase.

According to a recent report from Bloomberg published in Fortune, the most difficult chips to source currently are the semiconductors needed for microcontroller units, which are critical for automobiles but also electronic braking systems, air conditioning, and window control units. Compared to many chips on the market, microcontroller chips are much less advanced and, therefore, were originally much more readily available and made with smaller profit margins. As the largest chip manufacturers have switched production to focus on more profitable products for the consumer electronics and healthcare market, a supply of these chips have greatly decreased while demand remained high. The result has been a market gap that the black market eagerly worked to fill, even if outdated, secondhand, or counterfeit chips in something like a breaking unit could easily put lives at risk.

“Reused chips can cause problems because they might have been built for too small a temperature range, for example,” said Phil Koopman, an associate professor of electronic and computer engineering at Carnegie Mellon University. “Just as important is that chips wear out over time, so reused chips might fail much sooner than expected. I’m not aware of any practical way to detect this problem other than re-doing factory qualifications for temperature ranges and reverse engineering to check for signs of repackaging.” These chips can easily slip into vehicles unnoticed, he said.

Such a strategy simply cannot be sustainable, from both a financial and health and safety standpoint. A much more sustainable and secure option would be something such as a Parstat Inventory Ownership Solution, which allows manufacturers to acquire critical inventory from only authorized distributors without third-party markups or any strain to their on-hand capital. For more information, contact us today!