Microchip shortage seriously hits world’s automotive industry: what to expect next?

A shortage of microchips seriously halts entire sectors of the industry. Computer and smartphone manufacturers were the first to report on problems, now the wave has reached the automotive industry — concerns are suspending the production worldwide. A small component is threatening with causing a bigger crisis in the world economy. An inevitable rise in prices for cars, which already cost as much as flats, at least in Russia, expects us. According to car manufacturers, 7,7 million cars fewer will be produced in 2021 compared to 2020. Sales and profit are at threat, it is no surprise that the indicators will be levelled due to a high price of the commodity, it is a simple law of the market economy. Experts name the number of $210 billion as the amount of revenue car producers lost due to disrupted supplies of electronic components. Toyota said in late August it was cutting car production by 40%. It is a huge number if we come to think of it! In his next article for our newspaper, Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin talks about the consequences of the deficit of microchips around the world.

What microchip is

Chip is a complicated microelectronic device (electronic circuit). It is made of semiconductor crystalline (or film) — silicon (Si), gallium arsenide (GaAs), germanium (Ge) — and is placed into a solid package. An integrated circuit is a crystalline itself or film with an electronic circuit. A microchip is the same integrated circuit. The expression surface mounted components relate to the components that are mounted onto the surface, not through-hole technology. Nowadays most microchips are made in packages, and the integrated circuit will be the correct term.

This microchip can have any functions, even perform the role of a minicomputer. Chips are used absolutely everywhere — in sound amplification and reproduction devices, television, communication equipment, measuring appliances, computers, automation systems and many other things. Historically, Southeast Asia (South Korea, Taiwan, Malaysia, China, Japan) is the main region where microchips are made.

The situation in the chip market

The coronavirus pandemic led to a deficit of semiconductors. A colossal demand for laptops, equipment for remote working, game consoles and so on started to be registered in the spring of 2020. All this overlapped with the suspension of production of chips, since their manufacturers were preparing for a crisis (as everybody was) and didn’t forecast such demand for their products. Due to lockdowns, the logistics of goods went up in price around the world and became more complex. Experts say about a 60-70% rise in the amount of disruptions in global supply chains. Also, the trade war between the USA and China, which influences the positions of players in this sector, played its role. There was a huge fire in Japan, on the production site of the country’s third car electronics manufacturer, which paralysed the production for a few months.

The microchip production process itself requires crystalline “breeding”, which takes up to six months. Physically, this sector isn’t ready to meet the increased demand, which, by estimates, grew by 30%, by waving a magic wand. As a consequence, by the spring of 2021, all producers of high precision equipment, devices, cars and other products faced an urgent shortage of semiconductors. For instance, the production of Xbox, PlayStation game consoles still cannot go back to its usual schedule. Samsung delayed the production of a new flagship phone for the same reason.

Automotive industry

A modern car contains tens of various controllers — GPS, ABS and other security systems, engine control electronics, multimedia and much more. Without this small component, a modern car cannot leave the conveyor belt at all. As it has been written above, a serious decline in the amount of cars produced in the world is forecasted — approximately 10% of the world production. At the same time, demand for cars has recovered after the pandemic crisis. Life goes on — people change cars, new generations that also need their four wheels grow up.

In the spring of 2021, Honda suspended six of its plants in the USA, Canada, Mexico. This was followed by shutdowns in American tycoons — Ford, General Motors, Chrysler. Volkswagen, Volvo, Nissan plants paused in Europe in summer. It has already been written about Toyota’s plans.

The disruptions of supplies and deficit of chips reached Russian producers too. In June and July, AvtoVAZ suspended the production of Granta, Largus, XRay, Renault Sandero, Logan. In late August, all conveyor belts of the plant stopped, for 10 days. A shortage of electronic components is the reason.

The way AvtoVAZ solved this problem seems to be elegant — as there were no components, we made a Light version of all models, that’s to say, without electronic parts. Without the modern steering wheel with a control button, cruise control and multimedia system, GPS, ABS, electronic brake-force distribution, electric car mirrors, heating, etc. In September 2021, the panel of the Eurasian Economic Commission permitted all cars manufactured in the EAEU and Russia not to be equipped with the emergency response system (ERA-GLONASS). There is a deficit of components. This moratorium will be in force till the end of the year. The Russian Ministry of Industry and Trade explained this decision saying they didn’t want to shut the factories down and create a deficit in car dealerships.

According to different sources, the average supply term for chips for car control is now from 6 to 12 months, and these chips are for the simplest cars. Premium brands suffer much more, since the amount of electronics is off the charts. Against this background, prices for semiconductors augmented, by 20%.

“Our citizens’ low purchasing power will be the only deterrent to a price rise”

As it was already said, it will take microchip producers months to increase production volumes. The incessant pandemic still has an impact on supply logistics to factories themselves — microchip producers. Besides this, a transition to e-cars made a contribution — the number of semiconductors in them (and in hybrids) is twice higher than the one in ICE сфкы. This, in turn, can scotch the development of the e-car market.

The situation has reached the point where some countries are already creating new microprocessor plants, not to mentioned the sector’s leading companies. It is trillions of investments in dollars. The task is to stop the deficit and balance the market. One of the leading companies of this sector (from Singapore) forecasts that the situation in the market will stabilise only in a year, the deficit will go away in the summer of 2022.

Surprisingly, Chinese car manufacturers don’t have problems with components. It seems that during the trade war with the USA, they decided to provide chips, first of all, to their market, since China is the world’s leading chip producer. It is noteworthy that the first microchip in the USSR was created in 1961, mass production began in 1962. Are we a country that cannot build several factories and become one of the market leaders? Our public capitalism can perform this task. Moreover, experts say that Russia is already developing modern microchips. Plus, our defence and space industries really need domestic electronics — a lot of things are not available because of sanctions.

To sum up, I would like to note that for us, as ordinary consumers, such a development of events in the chip market is no good. Car prices are already growing, and their amount is simply small (only Chinese manufacturers’ cars can be purchased without a queue), delivery terms are increasing. There is an option of buying a Granta for 500,000 rubles, in the modification of “my granddad’s VAZ 2101 made in 1973,” but this won’t suit everybody. Perhaps, one should wait to purchase a new car and not finance the compensation for car manufacturers’ lost incomes. Our citizens’ low purchasing power will be the only deterrent to a price rise.

You won’t envy fans of premium brands at all — Mercedes has recently claimed it isn’t going to lower prices for cars even after the situation with electronic components stabilises. The message read that a higher price tag would prove the loyalty of the company’s clients and serve as key to access an elite club. Interesting times have arrived, we will see how things will be unfolding.

Artur Safiulin

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The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial.