Looking beyond the semiconductor shortage

Industry Europe talks with Rekha Menon-Varma and David Chouvelon from Vertaeon about how the automotive industry should prepare as supply chain woes and mineral scarcity loom for the EV market.

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Supply chain woes originating during the coronavirus pandemic have affected industry in several ways, but none are more pressing than the ongoing semiconductor shortage which has slowed the automotive sector to a crawl.

The sector is currently under regulatory pressure across the world to reduce its overall carbon emissions, resulting in a massive transition to electric vehicles, a trend that is certain to continue throughout the next decade.

Read more: Semiconductor market might reach overcapacity by 2023, IDC suggests

Supply chains have had to become more robust to accommodate, with key automakers and tech firms investing more and more into semiconductor capacity, urged on by governments like the US and EU.

"The imbalance created by the ongoing chip shortage is an excellent example of a perfect storm caused by the convergence of evolving market trends and semiconductor industry structure, overlayed with geopolitical tensions, and post-pandemic demand surges,” Rekha Menon-Varma, co-founder and managing partner at Vertaeon told Industry Europe.

“The chip shortage highlights the need for the automotive industry to have better visibility into manufacturing suppliers and partners, to gain a clear understanding of the volatility and shortcomings within its supply chains. While there’s an enormous amount of data available, many organisations haven’t leveraged it toward meaningful contingency planning for the next shortage," she added.

Vertaeon currently specialises in cloud-based analytics tools that provide risk assessment and mitigation planning for companies that act as important links in global automotive supply chains.

"All the evidence we've found points to the semiconductor shortage lasting until at least 2023," according to David Chouvelon, a business development advisor for Vertaeon.

"The systemic shortage of the raw materials required for the production of chips may not continue long-term, unlike the issues with battery development for EVs, which we are already seeing becoming an issue in the future," he added.

As demand for electric vehicles continues to surge, the demand for batteries will continue to climb. While the semiconductor shortage may end relatively soon, battery supply can only be dealt with by automakers increasing domestic supply, as is being seen with some larger developers such as Nissan in the UK or Bosch in the EU.

Read more: Nissan announces £1bn Sunderland gigafactory to boost EV production

However, industry leaders may have missed two major points regarding the semiconductor shortage.

The first, Menon-Varma claims, is the investment and planning needed to prepare for such a shortage would take "years and billions of dollars", and the second was a "slew of macroeconomic factors" such as demand fluctuations preceding the shortage which suppliers were unprepared for.

Investment in early warning signals could be key in preparing for any potential pitfalls in the future, and AI and machine learning could better equip companies to tackle supply chain issues.

Chouvelon added: "Software and algorithms can help companies reduce uncertainty by providing them with increased visibility that has been extracted from available data. Artificial intelligence and machine learning come into play here, as it would otherwise take an incredible amount of manpower to crunch the information available from different sources to find trends.

"This is what software-as-a-service models (SaaS) do - we customise based on a specific sector so that we can extract trends or identify risks for large sets of companies.

"It's not just about predicting the future, it's also about preparing for specific events. If you have disruptions due to extreme weather, for example, you need to know what specifically would be impacted on the supply chain, and having the tools in place to anticipate and enact contingency plans could prevent risks escalating."

"Many of us have automotive industry experience and the human element can be key to applying things to various industry sectors to help them best accommodate their needs," Menon-Varma added. "Knowing what data to analyse is just as important as having the means to do so."

Government support for domestic chip production has been very strong. Back in April, US President Joe Biden rallied automotive leaders and tech giants to invest in infrastructure to help combat the shortages. This initiative was given a $150 billion injection in May.

Read more: The scramble to end the semiconductor shortage

In addition, Biden also recently pledged to make half of the US' cars electric by 2030, which should cause something of a demand boom for batteries. It is therefore imperative that automakers get ahead of current issues to meet these goals.

Chouvelon said: "There is still something of a resistance to change, be it through range anxiety or any other number of issues. Demand is often not enough, and government incentives are a good way to convince people to make the switch. Demand is often not enough, and government incentives can skew the natural market dynamics."

Samsung is also in the process of deciding on a location for a mammoth $17 billion gigafactory. The city of Taylor, Texas, which is one of the potential sites, has recently offered large property tax breaks as an incentive to chose their city as the location.

Samsung already operates a chip production plant in Austin, Texas.

The EU has also made moves to tackle the chip shortage and the advancement of quantum technology, the former of which may be a bit ambitious owing to Europe lacking sufficient market infrastructure to justify the investment involved in a megafactory.

Furthermore, Tech giant Intel has also pledged €80 billion in funding for EU chip development.

The rally to get EV production rolling at maximum capacity is even more crucial in the UK, which has vowed to ban fully petrol-powered cars by 2030 and trucks by 2040.

"Another trend we are seeing is in the mergers and acquisitions (M&A) side. We fully expect to see more partnerships happening - perhaps not through outright purchases - but we should see more alliances, memorandums of understanding (MoUs) and deals between suppliers and manufacturers", Menon-Varma added. "We may also see a new initiative known as 'friendshoring', or collaborations and partnerships between governments to tackle the crisis."

However, she warned that, despite investments, rollout onto the production lines may take several years and M&A may come under more regulatory and political scrutiny, such as what is being seen with NVidia's recent acquisition of Arm.

Read more: UK to investigate national security implications of Nvidia's ARM deal

Tackling redundancies in supply chains was an issue only exacerbated by the pandemic and the growing demand surge, she added, with it being present for several manufacturers before.

This can be done by ensuring you have multiple suppliers or through the contingency measures mentioned earlier through having a clear understanding of market dynamics.

"Another hotspot we identified was through financial risk analytics. Early on, we could tell who would struggle and who would operate at a decent capacity through their cash flow and liquidity", she said. "Some smaller players have been acquired by a larger company or gone out of business during the pandemic."

Chouvelon said: "Downstream value chains are usually vulnerable to one key component, which may spark innovation to see what can be done without the raw materials, such as alternative technologies or ways of operating with a reduced supply.

"The other way is to invest in ways to gain alternate forms of raw materials - such as the recent joint venture by Bill Gates, Jeff Bezos and Mark Bloomberg to look at mining in Greenland."

The three primary raw materials used in the creation of car batteries are lithium, cobalt and nickel.

Lithium mining has always been carbon-intensive, so alternative solutions are being devised, such as the Zinnwald lithium project on the German-Czech border which will look at reducing the emissions along the lithium value chain and should see use within the EU.

Read more: Zinnwald: Europe's first major lithium project enters feasibility phase

The primary concern for cobalt is the human cost. Much of the world's cobalt comes from the Democratic Republic of the Congo, which has seen issues regarding child labour being used in mining, leading to initiatives, such as "controlled mining zones" in the country.

Other manufacturers, such as Intel, are taking a harder stance by refusing to do business with unethical suppliers.

"There are many different ways you can acquire these minerals, but the global market and environments are changing, and I don't think we can accurately predict who may control supply in key areas such as Greenland or South America within a decade," Chouvelon added.

Vertaeon believes there could be "tremendous geopolitical shifts" at play that could control who has access to end-product raw materials.

"Each country has very aggressive goals for EV production," Menon-Varma. "An issue that is likely to arise is raw material supply not being able to keep up with demand.

"One solution we saw during the chip shortage was a change to some of the features. We may see this again, but within actual designs for the electric vehicles themselves to manage with the existing supply of batteries and raw materials," she added.

As they stand right now, current goals for EV production could be perceived as unrealistic, but Vertaeon has suggested breakthroughs in recycling technology could stand to revolutionise battery capacity.

Chouvelon said: "Gaining a strong foothold in the supply chain rather than depending on traditional supply and demand may be key to overcoming shortages with raw materials. Whereas before the primary issues associated with these raw materials involved costs, now there are other things to be concerned about, such as reliability.

"Sometimes, it may be worth paying a little extra on materials to ensure the delivery of parts, because the cost of production pitfalls can exceed any extra you pay on materials."

The firm also suggests working to ensure conflict minerals - such as those mined in the DRC - are responsibly sourced, which could also stand to increase reliability downstream along the value chain.

"Ultimately, having adequate intelligence is key to navigating the complexity of these markets and is what we offer with our risk analytics platform which can aid companies in strategic decision-making in a secure and user-friendly manner", Vertaeon concluded.

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