Who would have thought that computer chips would be so important to driving a vehicle? About 40% of a new car’s cost goes to the electronics. In fact, each car can use between 500 to 1,500 chips! Vehicles of all kinds including trucks, boom lifts and bulldozers need these chips to enable all those features we now take for granted like a reverse warning, backup cameras, proximity detectors and on and on. The modern construction site (and company parking lot) would be unrecognizable today without computer chips.
These chips were very rare in vehicles in the 70s but gradually they began to be used for auto-dimming lights and later for anti-lock-braking systems and oxygen sensors. They make vehicles safer, more efficient, more reliable and more comfortable to operate. As chips evolved and became easier and cheaper to produce they became a commodity like steal or aluminum. Chip makers competed globally and when too many makers came online, prices would go down, so the makers that remain are the huge and efficient. Chip makers have historically also lacked transparency in acknowledging how many chips were available and what capacity limits they had. This sometimes allowed them to play with the supply-demand equation.
Covid caused disruptions in may businesses and chip making was no exception. Many factories shut down quickly having learned from previous recessions and assuming auto sales would dry up for considerable time.
Vehicle sales did tank at first but quickly came back. Inventory dried up and when factories did reopen to a scaled back capacity, the pent up demand and lack of supply drove chip prices much higher.
The supply of chips has been so dire that auto manufacturers have had to idle plants for months. The short supply of autos has of course driven prices higher. Many manufacturers are making vehicles without chips and parking them to wait for new supplies.
What’s Being Done
The U.S. Commerce Secretary, Gina Raimondo has been working to facilitate cooperation between chip manufacturers, their suppliers and customers like vehicle manufacturers. This has encouraged more transparency and allowed for better planning for all concerned.
The administration also has recently pressed governments in Malaysia and Vietnam to ensure semiconductor plants would be deemed “critical” businesses and maintain some production following COVID-19 outbreaks, officials said.
Raimondo by Stefani Reynolds/Bloomberg News
“You’re starting to see some improvements,” Raimondo said, adding that in recent weeks, Ford Motor Co. CEO Jim Farley and General Motors Co. CEO Mary Barra have told her that “they’re starting to get a little bit more of what they need” and the situation is “a little bit better.” *
Goldman Sachs published an analysis that indicated the peak impact of the chip shortage was in the second quarter and that production should ramp up again in July.
TSMC, Taiwan Semiconductor Manufacturing Co, makes many of the chips used by the biggest automakers. The company plans to increase production of chips by nearly 60% this year for it’s vehicle manufacturers.
The Commerce Secretary is trying to encouraging Congress to pass $52 billion in funds to increase chip production and encourage semiconductor research and development on U.S. soil.
Separately Intel recently announced that it plans to spend $20 billion to build two new chip facilities in Arizona. TSMC has also announced that it would build a $12 dollar factory in Arizona.
The White House has indicated that it considers excessive reliance on a handful of foreign chip makers a national security issue. Building out chip making capacity domestically will help guarantee supplies will be available despite global natural or political issues.