The semiconductor shortage may last into 2022

The last week has seen some new developments for the semiconductor shortage with automakers claiming the crisis could worsen as Asian suppliers prepare for manufacturing increases for the summer period.

The shortage has wrought havoc on the electronics and automotive industry, and Stellantis - the world's fourth-largest automaker - claims it may only get worse from here, with the potential to last into 2022.

Read more: The scramble to end the semiconductor shortage

The automaker saw 44 plants stalled at some point during the pandemic, primarily affecting its North American output.

The company revealed the shortages affected 190,000 units, roughly 11% of total output for Q1 2021.

However, Stellantis still operated profits for the quarter, seeing revenue rise by 14% to €37 billion owing to increased volumes in its other markets. Sales in Europe, the Middle East and China - the world's largest automaker - all rose.

The Group's CFO Richard Palmer admitted in a statement the company "posted strong first-quarter results" despite the shortage.

Volkswagen echoed similar sentiments in its latest quarterly report, telling its shareholders to expects lower-than-anticipated earnings for the second quarter. VW has already run into issues regarding the semiconductor shortage, including claiming damages from suppliers over manufacturing cuts.

The reasons for the shortage date back to early 2020 when the Covid-19 pandemic effectively brought manufacturing to a standstill in most sectors. When production restarted, there was a surge in demand for chips from home electronics companies, which commentators linked to the increase in remote working and in the demand for home entertainment during the lockdowns.

IHS Markit data suggests total cuts in global automotive manufacturing caused a loss of roughly 1.3 million cars for the first quarter.

"It will get worse before it gets better," said Phil Amsrud, an automotive supply analyst for IHS Markit regarding the effects on the automotive industry in the first quarter. 

"[In the] short term all that can be done is juggling priorities in the foundries to make more automotive MCUs instead of products for other markets. Longer-term, the automotive industry needs to make supply assurance as high a priority as cost savings to incentivise the supply chain to be more diverse. Moving to more advanced process nodes makes the industry even more susceptible to a limited number of foundry options," he added.

Amsrud added the shortage is expected to be mainly consigned to 2021 but may last sometime into 2022 as both the EU and the US look to tackling the issue head-on.

He concluded the effects on the automotive industry may balance out "by the end of the year."

Read more: EU's semiconductor plan "doomed to fail", says think tank

The primary effect the semiconductor shortage has had is on its plans to transition towards greener engines.

Countries such as the UK and Portugal have opted for flat-out bans to fully-petrol or diesel-powered vehicles within the next decade or so.

This has been supported by companies such as Volvo although there are concerns the chip shortage may significantly delay progress.

The EU is also in the process of discussing potential new environmental regulations as well as laying out its plans to achieve its European Green Deal.

Companies such as Nissan have opted to use this opportunity to increase domestic battery production owing to a clause in the Brexit trade deal which will penalise companies who source batteries outside the EU or UK past 2027.

While this may affect short-term production, this may make chip supply chains more durable and sustainable going into the future.

Like semiconductors, a large amount of the batteries used in Western production are sourced from Eastern suppliers from countries such as Taiwan.

The largest supplier, TSMC, has claimed it may be able to catch up to chip demand by June.

Speaking to CBS's 60 Minutes programme, the company's chairman Mark Liu said they were made aware of the shortages in December and have attempted to push out as much supply as possible starting from January.

He added: "Today, we think we are two months ahead, and that we can catch up the minimum requirement of our customers before the end of June."

"There is a time lag. In car chips particularly, the supply chain is long and complex and the supply takes about seven to eight months."

He concluded the US should push for greater education to allow for a greater workforce in chip manufacturing, arguing "moving the supply chain" could grow costly and become unproductive. 

Read more: Intel pledges $500 million towards women-owned businesses

Intel's new CEO Pat Gelsinger also appeared on the programme to discuss the shortage.

His company has recently pledged to address the chip supply by increasing in-house production of semiconductors ahead of US President Joe Biden's plans to address domestic supply issues.

Gelsinger said: "Intel doesn't presently make many chips for the auto-sector but because of the shortage it's planning to reconfigure some of its fabs to start churning them out.

"I think we have a couple of years until we catch up to this surging demand across every aspect of the business.

“Anybody who looks at the supply chain says ‘that’s a problem.' This is a big, critical industry and we want more of it on American soil. The jobs that we want in America, the control of our long-term future,” he added.

There are also concerns about how semiconductor supply will lead to "power struggles" between chip manufacturers and their customers.

Jean-Marc Chéry, chief executive of STMicroelectronics - one of Europe's biggest chipmakers - revealed in an FT interview that many automotive and tech companies may have to hold some inventory or agree to more non-cancellable contracts in order to reduce the unpredictable nature of the supply chains the pandemic has wrought, potentially leading to a shift in the current system.

He pondered how the changes could affect how these supply chains work and who pays the cost of carrying inventory.

Read more: Global semiconductor shortage hits "crisis" levels

“If they expect the semiconductor suppliers to be the 'bank,' to keep having a big working capital to support them, they can forget it,” he said.

All these developments hint the shortage may yet last into 2022, with some more conservative estimates forecasting the shortage to persist for a few more years, at least.

However, if domestic production can be scaled up, it may allow for automotive manufacturers to continue their drive towards electrification as industry sectors continue the push towards decarbonisation.

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