Home Chip shortage: Manufacturers in the slow lane

Chip shortage: Manufacturers in the slow lane

Jun 28–An ongoing chip shortage has left car manufacturers moving in the slow lane. In May of this year, UK car manufacturers produced nearly 55,000 vehicles; a seemingly healthy number as compared with 2020’s 5,314 produced during the same period within the prior year.

However, 2020’s numbers were new. As the COVID-19 pandemic began to strike workers worldwide, factory lines came to a halt. Many manufacturers temporarily shuttered their doors, in accordance with government guidelines.

The automotive manufacturing industry is moving forward, but at pace that may not meet supply chain partners’ and investors’ expectations. For example, in May of 2019, the UK churned out 116,035 vehicles—Which is two times the number of vehicles produced this year.

Driving the slow lane pace

Sluggish manufacturing performance is related to a global shortage of semi-conductors (chips). These elements are central to the functionality of vehicles. The inability to obtain chips has forced vehicle producers to operate at reduced capacity; to take the slow lane pace.

In April, Jaguar Land Rover decided to temporarily close two UK-based car plants. BMW temporarily suspended operations in its Oxford Mini location. The reason? The chip shortage.

“May’s figures continue to look inflated when compared to last year’s near total standstill of production lines. The recovery of car production is, however, still massively challenged here and abroad by global supply shortages, particularly semiconductors,” says Chief Executive of SMMT, Mike Hawed.

Supply chain disruptions, worldwide

The chip shortage not only affects UK-based facilities, but also affects car production plants worldwide. One major producer expect to lose as much as 50% of planned production (and corresponding revenue) in 2021. Another vehicle manufacturer asserts that pandemic-driven losses may cost the company $2 billion in profits. While car manufacturers account for only 10% of global semiconductor purchases, experts expect that they will collectively contend with 80% of the $125 billion in lost sales.

Will the chip shortage subside soon? Experts believe that the chip shortage may extend will into 2022. Automotive manufacturers may have to reassess and revise manufacturing strategies.

“Companies are implementing several mitigation strategies from redirecting chip supply to higher-profit vehicles to completing vehicles without certain modules in place in order to keep assembly lines running,” states Brandon Kulik, principal at Deloitte Consulting.

The just-in-time model

You may be familiar with the sourcing strategy known as the ‘just-in-time’ model, which is based on short-term forecasts. As the coronavirus pandemic gained a foothold in communities last year, factories closed and many canceled orders of semiconductors. In contrast, PC manufacturers increased orders due to a sudden global surge in laptop and computing device purchases. Once car manufacturing plants reopened and submitted semiconductor orders, they discovered that other higher-paying groups had ‘binge bought’ much of the supply.

“Auto companies are dealing with the fact that they are not only competing with each other, but every other company that uses similar chips on a cross-industry basis,” stated Kulik.

To ensure a more equitable distribution of semiconductors, the automotive sector is pushing for governments to step in. In early 2021, US President Biden called for efforts to strengthen domestic chip manufacturing capacity.

For more about how the semiconductor shortage has forced car manufacturers to take the slow lane, visit ZDNet.