Have you guys recently faced delays in the delivery of your new cars?
Well, if you thought you were the only one who faced this problem,
then my friend, you aren’t alone. This is a national crisis as car production across
the country has come to a halt . Well, the culprit has been found. A shortage
of electrical chips has created an entire blockade in the market. So, in today’s video,
we are going to tell you more about the issue and what is really going on. Let's get started!
The pandemic has hit everything hard, but things are finally beginning to look up
as slowly and steadily the market is starting to get back up on its feet. Manufacturing is finally
starting to make a comeback, but at the same time, a problem has arisen, the supplies of chips that
are used to operate most electronic devices are in short supply. This shortage was felt the strongest
in the automobile industry as entire shipments have been put on hold as the necessary parts are
still missing. According to analysts, normalcy might not resume for as long as two years.
It is difficult to imagine how a tiny coin-sized piece of equipment could have caused such a huge
issue, but the situation is in front of us. Tiny semiconductor chips have brought the auto industry
to a screeching halt. So, you must be asking what these chips are and why are they so important?
The chips are basically tiny transistors that are made from silicon. Without them,
electronic devices like computers, smartphones, appliances, and other electrical devices,
such as those in vehicles, will stop functioning. Silicon feeds a $500 billion chip industry,
and according to a report by the BBC, the chips are part of a global tech economy worth an
estimated $3 trillion. The raw material for these chips comes from countries like Mexico and Japan,
and the manufacturing usually takes place in China, Taiwan, and even in the U.S.
Now, if it is such a big industry, why the shortage? Well, once again, we will have to look
at the effects of the Covid pandemic. The return on investment of selling chips isn’t that great,
so companies that make these products often don’t invest in new foundries or factories to speed
up the development of these chips. Another major problem that is more in line with the pandemic is
that during the second quarter of 2020, automotive companies shut down and canceled all orders
for parts, which included these chips. These companies believed that a recession was coming,
which would affect the market for the next few years at least. However, The impact didn’t hit
all parts of the market . Many suppliers who weren’t happy with the order cancellations
went in search of newer avenues where they could sell their product. They found this new demand in
the big cloud infrastructure providers as the entire world shifted from conventional systems
to cloud-based computing. Meetings, education, seminars, contests, everything was now being
handled digitally. This meant that companies that dealt with cloud infrastructure saw their
demand skyrocket. Moreover, the pandemic didn’t do anything to affect sales of phones and laptops.
In contrast, it increased them, as every household now felt the need to own multiple computers.
Now there was the additional factor of trade sanctions that worsened this shortage.
You remember the Trump’s administration sanctions on China's Huawei. Well, 5G
phones have just rolled out, and these sanctions would have affected the production of Huawei,
which is the largest smartphone and 5G networking equipment manufacturer in China. Huawei wouldn’t
have been able to buy these chips after a certain period of time, so they gave really big orders.
The pandemic didn’t affect the sales of smartphones, so even companies like
Apple and Samsung placed large ship orders to keep up with the global demand. This,
in turn, leads to bulk orders which contributed further to the global chip shortage. Moreover,
the problem lies with the automotive sector itself. The automotive and industrial market
sectors are still using legacy node technologies, which in simple terms, are old and outdated;
this automatically puts them at the back of the line. They don’t get priority for chip orders,
unlike companies that are producing smartphones, laptops, and cloud infrastructure technologies.
So, in essence, it will take the automotive sector longer to recover from this shortage.
The automotive industries have inefficient supply changes,
which only compounds the problem as even if they get the chips to start moving through the system,
it will take a couple of months before they reach the end product.
So, for example, if these companies get the chips in the third quarter of the year,
it will be a couple more months before we begin to see cars that need the installation
of these chips to run systems like ABS brakes, intelligent smart systems, and power trains.
The entire problem stems from a lack of forward planning on the part of automotive companies,
and we don’t see gaming companies or Japanese companies crying about the shortage of chips,
now do you? It is only because these companies make better forecasts, especially the Japanese,
as they are used to natural disasters shutting down businesses, so they were better prepared to
deal with the situation following the pandemic. The on-ground situation is that many automakers
have stopped production in their factories and have stopped production of some vehicles
and have instead shipped the remaining supply of their chips towards cars that are more in demand
and can generate a higher profit for them, for example, pickups and SUVs. In the case
of General Motors and Ford Motor Company , these companies complete the vehicle without the chips,
and these completed models now wait in the company warehouse for the arrival of the chips. When the
chips arrive, the company puts the vehicle through final assembly then the cars are shipped to local
dealerships. Unfortunately, the delay can sometimes take weeks to be fully resolved.
The problem is compounded when you consider that one car part could use 500-1500 chips depending
on the complexity of the part, and considering the trend towards developing high-end cars with
increasingly sophisticated parts, the problem just seems to grow. The problem is expected to last at
least six more months, with the situation looking to improve within a year or so.
Now the question remains, what has the government or the companies themselves done to address this
problem? Well, as we mentioned before companies like G.M. and Ford finish their vehicles and
wait for the chips to arrive. Others have adapted to the situation by building vehicles that come
without various features. Tesla for example removed the passenger side lumbar support,
while G.M. has removed the fuel-saving features like automatic start-stop and fuel management
modules. Companies are also analyzing their supply chains as the need for revamping has
been felt more strongly than ever before. As for the government, the Biden administration
has assigned a task force to look into the supply chain of chips. The U.S. Senate has
even voted in favor of passing legislation that is intended to battle against overseas competition.
This includes a $50 billion dollar investment in the production of semiconductors.
The shortage of chips laid bare the weakness of limited domestic production;
the deficiency is so severe that it has turned into an issue of national security for the U.S.
Every major global market is seeing extensive help from their governments to ride through the
pandemic-induced recession. So we will probably be seeing smaller chip producers scale up to help
with the help of government money and support. In the future, you are more likely to see carmakers
becoming more integrated into the process of producing chips. We are expected to see multi-year
high-volume contracts so that production does not have to take a hit as it did during
the pandemic. Volkswagen has already indicated that it is going forward in this direction.
Hopefully, the shortage will be over within the next couple of months,
and all of us will be able to get the vehicle we have been waiting for so long,
hopefully, with all its features intact. Many lessons have been learned from this crisis;
only the future will tell if a shortage like this will happen again or not.
So that's all we have for today’s video. Tell us in the comments about your thoughts, oh and
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