Lack Of Chips Delays The Production Of 500000 Vehicles

“It seems incredible that such a small component, compared to the volume represented by a vehicle, can paralyze the entire line”, Cristian Castillo, professor of Economics and Business Studies at the Open University of Catalonia (UOC) , declares 20 minutes later . Castillo refers to semiconductors , or rather the lack of them, which has caused an unprecedented crisis in multiple sectors, including the automotive industry.

Any last generation device requires semiconductors for its activation. From a ‘smartphone’, to a washing machine or a car, these elements are integrated into their electrical systems, which have proven to be essential in an increasingly connected world. In fact, market forecasts point to a closing of this year 2021 with a turnover of 550,876 million dollars, 25.1% more than the previous year, according to the latest report on world semiconductor trade (WSTS, for its acronym). in English). An increase that is also contemplated for 2022, when the world semiconductor market is expected to grow by 10.1% (606,482 million dollars).

However, a series of factors that have come together in the last year have generated an unprecedented crisis, putting in check many sectors whose production chains depend on these components. This is the case of car manufacturers, which have been forced to interrupt their production -such as Ford, Mecedes-Benz or Seat, among others- and some even go to the ERTE -Renault plants at the Palencia, Valladolid and Seville plants. until the end of September, among others – to face the so-called ‘bottleneck’ that has slowed down the whole process.

“Alarm bells started jumping in the autumn of 2020, when it began to revive auto manufacturing , ” he told 20minutes responsible for Industrial Policy of Comisiones Obreras (CCOO), Gerardo Cortijo. As he acknowledges , “there is total uncertainty” in the sector, which occupies 10% of the country’s GDP. “There is fear that companies will convert something that should be solely and exclusively temporary into structural and more drastic measures will be taken,” he adds.

Manufacturing delay of 500,000 cars
This problem, already known as ‘the microchip crisis’, is beginning to take its toll in the sector. A modern vehicle can contain more than 1,400 semiconductor chips , which play a key role in functions such as the engine, the power steering or the keyless opening and closing of a door.

Well, the shortage and shortage of this type of elements and the interruptions that this has forced in the supply chain have globally delayed the production of 500,000 vehicles , according to a report published by the European Association of Automotive Suppliers (Clepa) in the past month of June . In Spain, points out the Spanish Association of Automotive Suppliers (Sernauto), the 17 car plants located throughout the territory stopped manufacturing 231,679 vehicles between January and May due to the lack of a single part: these chips.

Meanwhile, companies are trying to cushion the blow through concrete measures. “The classic internal flexibility measures are being used, the so-called bags of hours. Although there comes a point where these mechanisms are not enough to contain the production defect and that is when they have had to use ERTE “, says Cortijo.

“It is not easy to tell a customer that the receipt of their car can take between four and six months”
As a consequence of this decrease in production, a great impact is also being felt in dealerships, who are now unable to register what they had planned. “Right now, between 20 and 30% of the registrations that could be being managed are not being done,” says Raúl Morales, communication director of the Faconauto dealer association, 20 minutes away.

Car registrations continue to decline
“If you don’t have cars in stock to register, you can’t sell the car,” Morales says, explaining that what is being done now is to “take advantage” of what they have to serve their customers, with the disadvantage that delivery times are delayed. “It is not easy to tell a customer that the receipt of their car can take between four and six months when it is a factory order,” he says.

So if this is such an essential product, how can it be that companies around the world are having problems with sourcing and that the outlook has taken such a sharp turn in the short term of two years?

“We are experiencing a global stock break at the level of materials, as the shortage is not only occurring in the semiconductor sector, but has spread to others that have nothing to do with it, such as wood or plastic”, explains to this newspaper Cristian Castillo, professor of Economics and Business Studies at the Open University of Catalonia (UOC) . But all, the expert points out, have the origin of the problem in the same causes: an imbalance between supply and demand, the relocation of the manufacture of these chips, geopolitical reasons and a series of obstacles in the plants (outbreaks of covid -19, droughts, etc.), which have only exacerbated the problem.

Tension between supply and demand
The first of these is the coronavirus pandemic and the confinement that multiple countries imposed on their territory to stop transmission in 2020. “What this has done is to create a mess in everything that was production planning. The confinements caused that people stay in their homes and lower consumption, among them, that of vehicles. Then, the car manufacturers paralyzed the semiconductor orders that they had programmed, “the economist details.

Thus, the semiconductor factories decided to redistribute that production that was originally going to be destined for the automotive sector to other types of sectors that were experiencing a boom, such as consumer electronics (tablets, computers, etc.).

The problem came when the automotive sector began to reactivate its activity and saw that the stock it had no longer existed, since “it had been used for mass consumption manufacturing” , explains the UOC professor, stating that, in addition, “there is no factory that can assume the recovery of about four months of stoppage”. It is there when the ‘bottlenecks’ are generated, constituted by the “long queues of orders that are being sent to recover the stopped time and factories that do not supply.”

The European automotive industry is 60-70% dependent on chip production in Taiwan and China
In fact, another root of this crisis comes precisely from the inability of the manufacturers of these elements to meet all the demand, due to two main factors: relocation and the small number of companies that are dedicated to producing chips. ” We have been promoting offshoring for decades, in which, for example, at the European level, we have been staying more as designers than as manufacturers, deriving the latter function mainly to Asia. With which, we find that we do not have factories of semiconductors (or at least the ones that exist are not the pioneers or those that manufacture latest generation chips), which leaves us at the expense of what the companies located on the other side of the world do, “says Castillo.

The fact is that the European automotive industry depends 60-70% on the production of chips in contract manufacturing facilities in Taiwan (TSMC) and China (SMIC). There is currently only one company in the top 50 for semiconductor production, and that is Norway’s Nordic Semiconductor. All this despite the fact that the automotive industry is responsible for 37% of the demand for semiconductors in Europe, compared to a world demand quota of 10%, according to Clepa. In addition, they warn in the report, although Europe has a fairly solid specialized industry in chip design, the size “has been reduced by 50% in the last ten years, which highlights the need to re-evaluate the chain’s dependencies. supply in the critical area of ​​semiconductor technology “.

Nor should we downplay the importance of the trade war between China and the United States, whose splashes are also visible in this crisis. “China is not the main producer of semiconductors, but it is the one that imports the most, because it manufactures many computers, tablets and all the consumer products that require these elements, with which at the moment it is hoarding all the stock to be able to produce, putting in check to the rest of the countries, “says Cristian Castillo. A strategy that, in the end, is part of the “tug of war” with the US “to see who dominates the semiconductor sector, since it is strategic, especially considering that the future of electric vehicles will to go through this sector “, he adds.

Relocate production
Now, would the crisis have been of the same magnitude if Europe had not bet everything on relocation? Probably not, or at least “not as serious as the one we are experiencing,” says the economist. In 1990, Europe possessed 44% of the world’s production capacities. Today that percentage is just 10%. “It does not seem normal to me that a bloc the size of the EU is not capable of producing its own semiconductors,” declared German Chancellor Angela Merkel last May. “In the country of the automobile it is the last straw not to be able to produce the main component yourself , ” he added.

Vehicle manufacturing in Spain suffers from the lack of microchips
The case, according to Castillo, is not so much that the automobile companies themselves manufacture their own chips, but rather “adjusting the production lines and that we do not depend solely on two or three manufacturers.” Europe is already aware of this and, as the commissioner responsible for digital policy, Thierry Breton, explained in May, the goal for 2030 should be set at reaching at least 20% of world semiconductor production. “This is important, because it is better late than never”, highlights the UOC professor, who considers that “Europe is aware of the mistakes that have been made and now is when part of the recovery plans are being committed to promoting this semiconductor industry. “

Of course, it must be borne in mind that the change will not occur “overnight”, because “setting up a chip factory and establishing it can take between three and four years to come. Therefore, it is a solution that exists. what to take now, in the short term, but whose fruits we will not begin to see until the medium or long term, “he says.

Effects on the global economy
Despite this crisis, automobile companies have closed the first semester with benefits and, “at the end consumer level, for the moment prices are not being excessively affected”, points out Cristian Castillo, detailing that it is because “the companies they are still bearing the cost of the crisis and it is affecting their margin. ” However, the economist warns that, taking into account the forecasts -Brussels estimates that the crisis could last another 18 months- “perhaps it will be affected at some point in the final cost of the product, because if the company cannot sell what it had planned to maintain its margins, it is evident that it ends up affecting the final consumer “.

Data from manufacturers’ associations (Anfac) indicate that from January to June 2021 1.2 million cars have been manufactured in Spain, which represents an increase of 26.1% compared to the same period in 2020 , but compared to 2019 means a “sharp decline” of 21.6%.

All in all, the economist believes that the automotive sector will be more than capable of recovering despite the stops in recent months. “Then we can have another problem, which is that when situations like the current one are experienced, with a lack of stock, companies tend to make massive orders to different suppliers and in quantities well above what they need,” he warns.

This, which can cause an excess of stock when all activity is restored, “what in the supply chain is called the bullwhip effect ,” says Castells. That, therefore, would be another problem to deal with, so the expert emphasizes the importance of “keeping calm”, “not getting carried away by nervousness” and establishing constant communication with the usual suppliers “to try to adjust to the maximum the orders that are being sent “

From CC OO they demand a greater implication of the institutions and of the governments, because they consider that, although the measures that companies are carrying out today can be “effective”, “if the problem is not solved soon, they can be insufficient ” , asserts the head of Industrial Policy, Gerardo Cortijo, recalling that the automobile sector ends up giving direct and indirect employment to almost two million people in the country.