How Covid led to a $60 billion global chip shortage for the auto industry

Automakers across the globe are expected to lose billions of dollars in earnings this year due to a shortage of semiconductor chips, a situation that’s expected to worsen as companies battle for supplies of the critical parts.

Consulting firm AlixPartners expects the shortage will cut $60.6 billion in revenue from the global automotive industry this year. That conservative estimate includes the entire supply chain — from dealers and automakers to large tier-1 suppliers and their smaller counterparts, according to Dan Hearsch, a managing director in the New York-based firm’s automotive and industrial practice.

“All the way up and down the supply chain, everybody is out some portion of money,” he said. “This could be 10% of global demand this year, its impact, which craters the recovery. We don’t think we’re overstating this.”

General Motors expects the chip shortage will cut its earnings by $1.5 billion to $2 billion this year. Ford Motor said the situation could lower its earnings by $1 billion to $2.5 billion in 2021. Honda Motor and Nissan Motor combined expect to sell 250,000 fewer cars through March due to the shortage.

Semiconductor chips are extremely important components of new vehicles for areas like infotainment systems and more basic parts such as power steering and brakes. Depending on the vehicle and its options, experts say a vehicle could have hundreds of semiconductors. Higher-priced vehicles with advanced safety and infotainment systems have far more than a base model, including different types of chips.

“I can’t imagine really anyone getting spared,” Hearsch said. He said the situation could turn into a “knife fight” between companies, industries and even countries for supplies of the chips, which are used in everyday consumer electronics.

One of the only outliers so far is Toyota Motor, which on Wednesday said it has as much as a four-month stockpile of chips and was not immediately expecting the global shortage to hit production, according to Reuters.

Tesla CFO Zachary Kirkhorn told investors during the company’s quarterly earnings call last month that the shortage as well as shipping port capacity “may have a temporary impact” on the automaker. In a public filing, the company said the impact of the shortage is “yet unknown,” saying an unavailability of any parts could impact production.

Automakers are scrambling to get supplies of the chips, which have extremely long lead times due to their complexity. The shortage is far down the supply chain, causing a ripple effect through the entire network.

Some automakers, like GM and Ford, have confirmed plans to partially build products and store them until supplies for the vehicles become available. Others have said they may look to directly purchase the parts from smaller suppliers, cutting out much of the current supply chain.

Research firm IHS Markit anticipates 672,000 fewer vehicles will be produced in the first quarter of 2021 due to the semiconductor shortage, including 250,000 units in the world’s largest vehicle market, China.

Although major semiconductor suppliers such as Taiwan-based Taiwan Semiconductor Manufacturing and United Microelectronics have announced investment plans to increase production capacities, IHS says such plans will do little to nothing to relieve the short-term shortage.

“Because the cause of these constraints is the result of increasing demand from OEMs and limited supply of semiconductors, it will not be resolved until both forces are aligned,” said Phil Amsrud, IHS Markit’s senior principal analyst for advanced driver-assistance systems, semiconductors and components.

One of the automakers most affected is Ford. The company was forced to significantly cut production this week of its F-150 pickup, which is critically important to the company’s profits. Ford said it is closely working with its suppliers to purchase the chips, which are largely unique to the pickup and can’t be substituted with those from lesser-priced vehicles.

That’s different from crosstown rival GM. The Detroit automaker has temporarily halted production at three car and crossover plants in North America through at least mid-March. The effort is meant to prioritize production of its more profitable full-size pickups and SUVs, according to CFO Paul Jacobson.

The global automotive industry is an extremely complex system of retailers, automakers and suppliers. The last group includes larger suppliers such as Robert Bosch or Continental AG that source chips for their products from smaller, more-focused chip manufacturers such as NXP Semiconductors or Renesas.

A kink in the supply chain during any part of the process can have a tremendous ripple effect across production.

“This is a classic example of the bullwhip effect,” said Razat Gaurav, CEO of supply chain software and analytics firm Llamasoft. “Small changes in demand, as they propagate further upstream in the value chain, the variability and the volatility grows dramatically.”

Much of the problem begins at the bottom of the supply chain involving “wafers.” The wafers are used with the small semiconductor to create a chip that’s then put into modules for things like steering, brakes and infotainment systems.

A 26-week lead time is needed to build the chips before they are installed in a vehicle, according to Hau Thai-Tang, Ford’s chief product platform and operations officer.

The origin of the shortage dates to early last year when Covid caused rolling shutdowns of vehicle assembly plants. As the facilities closed, the wafer and chip suppliers diverted the parts to other sectors such as consumer electronics, which weren’t expected to be as hurt by stay-at-home orders.

“Those chip manufacturers as well as wafer manufacturers started redeploying their capacity to like consumer electronics, which was growing because of people working from home and virtual working patterns,” Thai-Tang said during an investor conference last year. “Fast forward, if you add 26 weeks to when they made those decisions, the drop-off or the trough in the supply started to hit automotive the latter half of last year, going into Q1.”

But demand for new vehicles was more resilient than expected during the shutdowns, particularly by consumers, so the industry recovered far quicker than anyone expected. As that happened, chip suppliers were continuing to divert resources away from automotive, and they’re attempting to play catch-up with demand from the automotive industry.

“There’s no easy way out of this,” said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research. “Last year we knew that once they were able to flatten the curve and get safety protocols in place, they could return to production. That’s not the case now. We’ve got really long lead times and more and more demand on chips.”

– CNBC’s Lora Kolodny contributed to this article.