The Looming Chip Crisis in the Automotive Industry, and How to Overcome It

The automotive industry is changing. According to Bank of America Securities, there will be an average of approximately 60 new vehicle models entering the market between 2022 through 2025. That amounts to a 50% increase over the current 20-year average. The overwhelming majority of these models will be electric vehicles. In many cases, this means that automotive manufacturers will be entering the buyer’s market currently populated by consumer electronics, healthcare, and other related industries.

One of the biggest, and often overlooked reasons for this is the logistics involved in the research and development into the new components OEM automakers demand.

This poses an obvious issue; although the electronic component and semiconductor market recognizes the coming demand spike and has worked to ramp up production in the coming years (according to ABI Research, there will be a 66% increase in individual new component programs worldwide over the next five years), such a drastic change to the market cannot happen overnight.

Electronic component production is relatively easy to predict. Barring an unexpected challenge such as a lockdown of the global economy (e.g. COVID-19), the volume output of chips can be easily predicted, allowing procurement managers to plan accordingly while allowing for flexibility if needed. Chip development, however, is far less automated. Indeed, it is a complex process that is more dependent on workers with highly specialized skillsets. This process alone, before production even begins, can be as long as 12 months no matter who the waiting customer is.

If OEMs fail to factor in this time into their production estimates, conflicts can easily occur. Not only can vehicle assembly stall outright depending on the component in question, but this can create some friction between the OEM and component manufacturer — friction founded on a misunderstanding that component production levels will remain consistent even during research and development.

As the new, exciting future of the EV market draws nearer, it is absolutely critical for OEMs to put an added emphasis on on-hand buffer stock of critical inventory. Having the components needed to maintain production output six months to a year through supply chain disruptions is the only true way to guarantee business continuity. Such a strategy does come with inherent challenges, however — namely, sacrificing precious working capital upfront, which could tie up resources in the short term.

For more information on how the financing offered through a Partstat Inventory Ownership Solution can maintain your company’s working capital and even greatly reduce overall cost through bulk purchase discounts and inventory carrying costs, contact one of our customer representatives today. We’d love to talk to you!