Semiconductor Scarcity Proves Automakers Need Supply Chain Solutions

By Logan Wamsley

It was not a surprise that the electronics manufacturing industry faced sizable challenges in the first quarter of 2020 following the series of global lockdowns brought on by the COVID-19 pandemic. What was a surprise, however, was the rapid demand that materialized following the market recovery near the end of the year, far outpacing supply levels and creating a lack of semiconductors.

Automakers Hit Hard by Semiconductor Shortage

The industry struggling the most as a result of this demand has been automotive. Volkswagen, Ford, Fiat Chrysler, Toyota, and Nissan have all announced that they have been forced by the market to delay production in some capacity in order to keep factories open.

“The semiconductor shortage is causing considerable disruptions in global vehicle production across all manufacturers,” said Volkswagen. “Due to the Covid-19 pandemic and the resulting decline in sales in the automotive industry, leading semiconductor manufacturers switched their production to other customer industries, such as consumer electronics. In the meantime, however, the car markets have recovered significantly, especially in China. This exacerbates the current situation… [that] the industry — and also the Volkswagen Group — lacks appropriate electronic components.”

Toyota spokesman Scott Vazin expressed similar sentiments. “This is absolutely an industry issue,” he said. “We are evaluating the supply constraint of semiconductors and developing countermeasures to minimize the impact to production.”

Despite some initial optimism this could be a short-term issue, warning signs indicate the semiconductor shortage may be here to stay for now. For example, Taiwan Semiconductor Co. and United Microelectrics Corp. — two of the world’s top three foundries — have both stated that they are operating at maximum capacity, and all they can do to alleviate the market is reallocate production.

In the meantime, automakers have no choice but accept extended lead times as semiconductor manufacturers concentrate on more lucrative markets which feature customers such as Apple and Qualcomm. Some experts state that market equilibrium might not be reached until at least early 2022. The situation is so concerning that the German government took the unprecedented step to directly ask chipmakers to extend more resources for their automotive customers, despite the fact that chipmakers only answer to customers and shareholders.

Without question, with the current state of the market expected to be the new normal for the time being, automotive manufacturers will need to adopt new sourcing strategies to cope.

Inventory Management Solutions to Meet Today’s Challenges

One such solution would be one of the inventory ownership solutions offered by Partstat, which allow customers to leverage Partstat’s purchasing power to acquire high levels of critical inventory direct from the manufacturer ahead of potential component shortage situations. Such transactions can used as part of a last time buy, or they could be used to purchase buffer stock to maintain production levels through anticipated market volatility, locking in today’s cost and avoiding any resulting price inflation.

Plus, by allowing Partstat to purchase inventory on the customer’s behalf, the customer gets to maintain all of their working capital, which can be used to pursue higher ROIC initiatives. Even in difficult times, Partstat customers will have the resources on hand to expand their workforce, pursue new design initiatives, or improve their infrastructure.

A New Way Forward

Not maintaining steady production levels is not just an issue of dollars and cents for automakers — it has very real repercussions. For example, General Motors has just announced it has been forced to idle three of its assembly plants in North America, and run a fourth at only half capacity in South Korea. For now, unions have ensured that autoworkers will still receive supplemental pay and unemployment valued at 75% to 80% of their salary, but should such conditions remain, long-term permanent layoffs may eventually become necessary. A rethinking of the automaker’s supply chain with the help of a Partstat inventory management solution would ensure that such scenarios never come to pass.