How automakers and OEMs are navigating the chip shortage

TTI Americas director, transportation market, Gabe Osorio

TTI Americas director, transportation market, Gabe Osorio, explores the origins of chip shortages in the automotive sector and introduces examples of remedies.

It’s no secret that challenges to the automotive supply chain are impacting manufacturers and consumers alike. Spurred by the pandemic-induced drop in vehicle demand and exacerbated by closed factories, adjusted budgets and demand for other consumer electronics, a lack of semiconductor chips continues to affect automakers. During the May 2022 World Economic Forum, industry leaders shared that automotive supply chain problems would likely continue into 2024.

Most vehicles rely on at least 25 microprocessors, controlling everything from fuel management to infotainment screens. Vehicles with advanced driver assistance or safety systems may require upwards of 100 chips. The effect of the chip shortage is evident in the market—automakers built 1.7 million fewer vehicles in 2021 than in 2019, according to Consumer Reports. The average car payment in the United States is approaching $700 a month for new vehicles, but demand has not dropped. With a reduction in the number of vehicles projected to be built in the second half of this year, there remains high and growing demand for chips. This will be exacerbated by the war in Ukraine, which has disrupted the global supply chain of semiconductor components, including neon gas.

These challenges are also affecting the growth of the electric vehicle market. Although demand for hybrid or electric cars is growing alongside increased government funding and public charging infrastructure, specialized components are in short supply. While manufacturers of internal combustion engine vehicles have adapted to the chip shortage by suspending optional features such as heated seats, a variety of semiconductor chips are essential to the function of electric vehicles. As new and expanded electric vehicle platforms continue to be announced, more pressure is placed on the chip market.

The automotive industry is making long-term changes to the shortages in a number of ways. Many automakers, including Ford and GM, are forming their own direct partnerships with chip manufacturers to boost chip access and shrink the supply chain. Other manufacturers are looking to move designs to different packaging sizes with less constraints. Many are allocating scarce resources into newer or higher-end models to ensure they’ll make a profit, so more economical cars may be less likely to have access to necessary components.

Ford and other automotive original equipment manufacturers are also moving toward a custom ordering system. This encourages consumers to preorder their vehicle with an automotive factory and receive the car within a few months. This approach will help stabilize the supply chain and allows manufacturers to produce what is needed instead of having to supply a month’s worth of inventory on a dealer lot.

Component manufacturers and distributors are also working to ease supply chain pressure and reduce the chip shortage. Manufacturers are rolling out products that meet the need for higher power requirements in EVs. The components that TTI sells, including interconnects, passives and discretes, have seen continued lead time lengthening, although this appears to be leveling off and, in some cases, retreating, signaling a positive sign for overall supply chain health. Partnering with a distributor that understands the challenges of the current market and ways to adapt can help automakers navigate this challenging environment.