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Lack of Tiny Parts Disrupts Auto Factories Worldwide


Automakers braced for turmoil when the pandemic hit. They expected supply chain disruptions and plummeting sales. But they never figured that a year later one of their biggest problems would be PlayStations.

Strong demand for gaming systems, personal computers and other electronics by a world stuck indoors has sucked up supplies of semiconductors, forcing carmakers around the world to scramble for the chips that have become as essential to mobility as gasoline or steel.

Virtually no carmaker has been spared. Toyota Motor has shut down production lines in China. Fiat Chrysler Automobiles temporarily stopped production at plants in Ontario and Mexico. Volkswagen has warned of production problems at factories in China, Europe and the United States. Ford Motor said last week that it was idling a Louisville, Ky., factory for a week because of the shortage.

When Covid-19 hit, automakers slashed orders for chips in anticipation of plunging sales. At the same time, semiconductor makers shifted their production lines to meet surging orders for chips used in products like laptop computers, webcams, tablets and 5G smartphones.

Businesses also upgraded their digital infrastructure to handle online meetings and employees working from home, while telecommunications companies invested in broadband infrastructure, further fueling demand for semiconductors.

Then auto sales bounced back faster than expected at the end of 2020, catching everyone off guard. The shortages of chips that ensued are expected to last well into 2021, because it can take semiconductor makers six to nine months to realign production.

“Consumer electronics exploded,” said Dan Hearsch, a managing director at the consulting firm AlixPartners. “Everybody and their brother wanted to buy an Xbox and PlayStation and laptops, while automotive shut down. Then automotive came back faster than expected, and that’s where you get into this problem.”

While the shortage is not expected to cause auto prices to rise very much, buyers might have to wait longer to get the vehicles they want.

The chip shortage has its roots in long-term forces reshaping the auto and semiconductor industries, as well as short-term confusion from the pandemic.

During the past decade, carmakers have become increasingly dependent on electronics to boost the appeal of their products, adding features such as touch screens, computerized engine controls and transmissions, built-in cellular and Wi-Fi connections, and collision avoidance systems that use cameras and other sensors.

New cars can have more than a hundred semiconductors, and the lack of even a single component can trigger production delays or shutdowns, industry analysts and consultants said.

Long-term pressure on chip makers to control production costs has also played a role. Semiconductor companies that supply the auto industry, such as Infineon, NXP Semiconductors and Renesas, chose to have their most advanced chips made for them by external manufacturing services, known as foundries. But the manufacturers also maintain their own factories to make simpler auto chips, frequently fabricating them on eight-inch silicon wafers rather than the 12-inch discs used in more modern plants.

Manufacturers with plants using older eight-inch wafers weren’t easily able to increase production. They hadn’t invested much lately in new equipment, which is now harder to find because that technology is older, said Syed Alam, global lead for Accenture’s global semiconductor consulting practice.

Geopolitics also played a role. The Trump administration in September placed restrictions on Semiconductor Manufacturing International Corporation, China’s main foundry, which produces chips for cars and many other applications. The company’s customers began looking for alternatives, generating additional competition for chip supplies from other foundries, said Gaurav Gupta, a vice president at the research firm Gartner.

The chip crisis is an example of how the pandemic has shaken the global economy in unpredictable ways. Carmakers expected to face supply chain shortages, and plants closed early in 2020 because of fear that workers would infect one another, or because trucking firms had stopped delivering. Most U.S. auto factories ceased production for roughly two months last spring.

But suppliers and carmakers quickly found ways to contain contagion within factories and got assembly lines going again. The impact on most parts supplies was less than feared.

The semiconductor shortage came out of left field, hitting the industry at a perilous moment. Sales have plunged worldwide. In Europe, for example, they were down 25 percent in 2020.

This is all happening while automakers are trying to navigate a shift in basic technology from internal combustion engines to batteries, which has subjected them to new competition from Tesla, the California company that has become the most valuable automaker in the world by far, and emerging Chinese manufacturers like Nio.

Exactly how long the shortage will last is unclear. It can take 20 to 25 weeks from the time new orders are placed for chips to be produced and work through the supply chain to reach cars, said Michael Hogan, a senior vice president at GlobalFoundries, a big chip manufacturer that services the auto industry and other markets.

“We are doing everything humanly possible to prioritize our output for automotive,” Mr. Hogan said.

The German auto electronics supplier Bosch said the shortage was particularly acute for integrated circuits used to control engines, transmissions and other key functions. “Despite the difficult market situation, Bosch is doing all it can to keep its customers supplied and to keep any further impact to a minimum,” the company said in a statement.

Carmakers and suppliers are reacting as best they can. Honda said it had not had to stop any production lines, but was putting the priority on its most popular models. BMW, based in Munich, said it had been able to maintain production but was “observing the situation intensively” and in constant contact with suppliers.

The German supplier Continental, which is best known for tires but also produces electronic components, called on semiconductor producers to build up capacity in the foundries that produce chips.

“Future investment in these foundries will therefore be critical so that the automotive industry can avoid such supply chain upheavals in the future,” Continental said in a statement.

Infineon, based in Munich, said it was stepping up investment in new production capacity in 2021 to as much as 1.5 billion euros, or $1.8 billion, from €1.1 billion in 2020. The company is also ramping up production at a new chip factory in Villach, Austria, that will produce 12-inch wafers.

But it will take time for the semiconductor makers to catch up. In the meantime, PlayStations have priority.

“Automotive came back and they are not the front of the line for chips anymore,” said Gary Silberg, global head of the automotive practice at KPMG.

Neal E. Boudette and Hisako Ueno contributed reporting.



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