Extreme auto chip shortage won’t return to normal until April-May, analyst says

It's easy to blame everything on COVID-19, so why not blame the extreme shortage of auto chips on the pandemic as well. Production will return to normal, but not for another four months, according to analysts. (Getty Images)

 

Automotive chip shortages have hit extreme levels, causing some carmakers to shutter production plants and idle workers temporarily in North America, following an earlier trend elsewhere around the globe.

The global auto chip supply will not return to normal levels until April- May, one analyst predicted this week.

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Why has this happened?

RELATED: Chip shortages hit even as auto chip sales climb

Part of what has happened lately is psychological as the auto chip shortage helped boost fourth quarter 2020 buying by 30% compared to the third quarter. A similar pattern emerged when people started hoarding toilet paper in the spring, leaving store shelves empty. Shortages in both auto chips and TP apparently share something in common—the pandemic. 

The auto integrated circuit (IC) shortage has reached the “extreme” level of late stemming from a demand drop in second quarter 2020, explained Dan Hutcheson, an analyst at VLSI Research. Carmakers were able to see that car sales were going down in the spring, so why build more cars that would sit on lots as the pandemic spread and people worked and studied from home in far greater numbers, lessening their need for cars.

That demand drop naturally caused chip foundries to shift to making circuits for other needs, including PCs and chips used in servers to drive networks used by all the work and study from home. New cars require dozens of chips to operate, especially with assisted driving technologies taking off.

The auto chip shortage is “far more related to Covid because auto makers slashed orders in Q2,” Hutcheson said. “Chip companies and foundries responded by shifting manufacturing to hot areas like data center and networking.”

Then, in the fourth quarter of 2020 there was a surprise.  Auto sales were up for many carmakers, which Hutcheson and some other analysts attribute at least partly to families moving to the suburbs where cars were needed in the absence of mass transit. Hutcheson also tracked a rise in average used car sales prices, up about 9% in December over December 2019.  The demand for cars started picking up in mid-summer.

However, when automakers came back into the chip market in the fourth quarter to be able to build more cars, “the chip pipelines were empty,” Hutcheson said. “When they came back, integrated circuit makers mainly shipped out of inventory and are only now beginning to bring production back,” he said earlier this week.

Hutcheson estimated it takes about four months for a chipmaker to get an order and start making wafers until a final chip makes it into a car or other product.  He advised carmakers to expect normal chip supplies to return in the April-May timeframe.

A wide variety of chipmakers produce chips used in vehicles, such as Texas Instruments, Infineon, Renesas and NXP, but chipmakers have mostly not commented on the shortages. Infineon is currently in a quiet period, but told Fierce Electronics it is "carefully monitoring the situation in the automotive supply chain and had already factored-in a certain growth level for car production in 2021."  The company is currently ramping production of a 300 mm facility in Villach, Austria. 

*Renesas said via email to Fierce Electronics that the demand for auto semiconductors is "quickly recovering now after the sudden decrease after lockdown, and the lead time is long, which may explain why it is now highlighted as an issue."  The company said that demand for various semiconductors, not just for vehicles, "is tight overall," due to stay-at-home practices with COVID-19.  

*"We are ramping up our production for automotive semiconductors while transferring production of some automotive semiconductors from foundries to our sites," Renesas added. "We are enhancing supply chains to maintain long and good relationships with customers, suppliers and outsourcing partners." 

As for psychology, there appears to be the same buyer hoarding behavior with auto chips as with toilet paper.  That chip shortage has helped accelerate auto chip market sales and prices, to the point that in the fourth quarter auto chip sales reached $6.2 billion globally, up 30% from the prior quarter and 11% from the fourth quarter of 2019, Hutcheson reported last week.

Some car plants have been idled temporarily, such as the Ford Motor Co. SUV assembly facility in Louisville, Kentucky, as Fierce Electronics and others reported on Monday. Honda Motor is reducing output at five factories across North America, Automotive News reported. https://www.autonews.com/manufacturing/chip-shortage-snarls-auto-output-worldwide

To sum up: What has happened over the past year is a combination of the pandemic causing demand to drop in the second quarter and a sudden uptick in chip buying in the fourth quarter with chip prices going up as well due to limited supply.

*This story was updated with a response from Renesas.