For several months, many sectors have been strongly affected, in a rather uneven way, by the semiconductor crisis. As a reminder, semiconductors are small electronic chips that are indispensable in any modern electronic system. Whether it is to produce a video game, a vehicle or even a computer, semiconductors are essential to allow information to be transmitted to the machine, like an electronic brain. In this article, we will have a look at the current situation, which is evolving day by day, in order to better understand the mechanisms and complexities related to this shortage.
The automotive semiconductor shortage: one of the consequences of Covid-19.
The automotive sector is one of the sectors that has been most affected by the semiconductor crisis. Several factors can explain this phenomenon and we spoke about them in our previous article.
Few semiconductors are available and the automotive sector is far from being the first to be served as it represents only 10% of the customers of the manufacturers of these components. Other sectors are more important, such as telephony, gaming, crypto money …and are therefore a priority.
Due to the pandemic, the automotive sector experienced a sharp drop in demand for vehicles in the first half of 2020, thus significantly slowing down car production. At the same time, the shift to teleworking and the resulting need for increased connectivity has led to a considerable increase in demand for computer hardware (personal computers, video games, communication equipment, etc.). All of them, the car, the computer, the telephone, the game console… all of them without exception require the manufacturing of semiconductors.
This is why, with the Covid-19 crisis, the companies producing these chips have concentrated their efforts on these other sectors (video games, 5G, telephony, etc.) which are proving to be much more profitable than the automotive sector. However, when demand from the automotive sector picked up faster than expected in the second half of 2020, the semiconductor industry had already redirected a major part of its production to meet the demand of other more lucrative areas. The automotive industry was therefore no longer the priority for the producers of these electronic chips.
Clearly, this shortage of semiconductors is now having a direct impact on car manufacturers.
Stellantis, Renault, General Motors and Ford have all had to slow down or even stop production lines for their vehicles. As for Mercedes-Benz, it has been forced to stop production of several of its top-of-the-range models (S-Class, E-Class, etc.).
We are talking about 11 million units this year that could not be produced because of the shortage of semiconductors, delays in packaging and testing of chips, (source from the research firm IHS Markit estimates today). This loss would represent more than 500 billion dollars worldwide, further penalizing an industry already weakened by COVID-19.
The most optimistic industry professionals estimate a return to normal for the third quarter of 2022, but most are betting more on 2023 or even 2025.
For them, car manufacturers have no choice but to wait and accept the delays that are getting longer by the day, without penalizing consumers, since to date no manufacturer has passed on this increase in the purchase price of semiconductors in its catalogue prices.
However, some manufacturers may review their prices if the price increase continues beyond 2021.
The CEO of Daimler explained in an interview that it would probably take until 2023 to see the crisis resolved. Carlos Tavares, the CEO of Stellantis, said in a recent interview “The semiconductor crisis, from everything I see, and I’m not sure I can see everything, is easily going to extend into 2022, because I don’t see enough signs that the additional production from Asian sources will reach the West in the near future”.
Banks are also reacting, and in particular the Swiss banking group Mirabaud, which stated in a French media report that “The shortage of semiconductors could last longer than expected for a number of reasons, in particular because the measures announced by the major foundries to meet demand will take time to take effect.
Semiconductor production: a very complex process
Semiconductors are indeed very complicated to produce: their production takes place in several stages carried out in very specific installations dedicated to this purpose. This requires very sophisticated technical, human and material resources. There can be up to 1400 process steps (depending on the complexity of the process used) in the manufacture of a wafer, and each process step typically involves the use of a variety of highly sophisticated tools and machinery. In addition, a great deal of research and development effort is required to design and provide relevant and efficient after-sales service for these electronic chips.
Not to mention that the idea of reassigning a production line is almost impossible. Indeed, to imagine that a production line for a semiconductor dedicated to mobile phones or computers (for example) can be immediately reassigned to an electric car is not only false but would cost a considerable amount of money.
Why is this so? Because the reallocation from a conventional (not semiconductor) production line to a semiconductor production line is very complex, costly and can take several years.
For example, a semiconductor manufacturer will hesitate twice before sending hundreds of millions of dollars’ worth of photolithography machines (designed by ASML) to another factory dedicated to another sector.
In addition, to the manufacturing process in the context of a reallocation of resources for semiconductors, which would be particularly complex, the manufacturing time is also a parameter to be taken into account. Indeed, as the SIA (the US semiconductor manufacturers’ association) explained, it can take up to 26 weeks, or almost 6 months, to manufacture a finished chip for a customer.
Typically, the production cycle for a semiconductor wafer takes an average of 12 weeks and can be as long as 14 to 26 weeks for the most advanced production lines, not to mention the packaging of the chip, including testing and assembly, which can take up to 6 weeks, or nearly 2 months.
As you can see, it takes an average of 6 months to produce semiconductors on complex and costly production lines.
The small number of players capable of producing semiconductors makes this crisis all the more difficult to overcome.
Today, three companies dominate the production of semiconductors: the American Intel, its South Korean competitor Samsung, and the TSMC group, based in Taiwan. It should be noted that these are mainly Asian players who can therefore decide to favour the sector(s) of their choice according to the financial gain involved.
This also implies a strong dependence of the semiconductor consuming industries (including automotive) on these suppliers.
The semiconductor industry is highly concentrated and outsourced (75% of production comes from East Asia).
The need for semiconductors is now reaching new sectors.
In addition to the obvious sectors such as telephony, video games or the automotive industry, another sector that one might not think of, also has an increased need for semiconductors. This is in fact cryptocurrency. In order to function optimally, cryptocurrencies need to be equipped with these valuable microchips.
According to Nomura Bank, the demand for bitcoin cryptocurrency accounted for 10% of the total sales of TSMC, one of the largest semiconductor producers.
This is one of the reasons why this shortage is not going to end anytime soon.
This is why the various players directly affected by this shortage are trying to find solutions and alternatives in order to limit the negative impacts, particularly by rethinking local production, as Europe would like to do.
Relocating production to Europe
In order to limit its heavy dependence on Asian semiconductor producers, Europe is trying to relocate some of its production to its own country.
The American company Intel, currently a major manufacturer, announced in September 2021 that it would invest almost 80 billion euros in Europe in order to increase its production capacity in this region.
France and Germany appear to be the countries that are likely to be of great interest to the American giant.
Europe’s ultimate goal is to double its production capacity, which is currently only 10%, by 2030.
European industries must also ensure that they make full use of the resources (human, technological and material) at their disposal in order to be as well prepared as possible for local production.
The European Union already has chip manufacturers such as STMicroelectronics, Infineon Technologies, NXP Semiconductors… It would therefore be necessary to co-construct with these players an appropriate production relocation strategy that meets the interests of all.
However, it should be borne in mind that relocating production (in Europe) is an alternative that will take a long time to achieve. Indeed, the complexity of the semiconductor production and supply chain makes transfers from one factory to another very complicated.
The professional organization SEMI, which brings together most of the players in this sector, had already sounded the alarm in 2018, and a few weeks ago declared that 29 factory construction projects were currently being developed worldwide.
Three of these are expected to be located in Europe and will be operational by 2023.
Regulation by public institutions for more equality between the different sectors
We know that currently, semiconductor manufacturers tend to favour certain industries to the detriment of others. This is why it seems appropriate that rules be put in place by European public institutions to encourage semiconductor suppliers to distribute these chips more equitably among the various sectors with a strong need. This would in particular help the automotive sector, which is one of the industries most affected by this shortage, to gradually recover.
“We need to create together a state-of-the-art European semiconductor ecosystem,” European Commission President Ursula von der Leyen told the European Parliament on Wednesday during her annual State of the Union address. The German also announced a legislative initiative on the subject, which should be formalized in the first half of 2022
However, as you will have understood, getting out of this crisis is not that simple and will take time. This is why SNECI, thanks to its expertise in Industrial Performance and Business Development, can help you to deal with the hazards of logistics (longer delivery times, production suspensions, etc.) reinforced by this semiconductor crisis. Thus we have a network of 12 000 suppliers all around the world.
We have a qualified Purchasing and Logistics team that assists our clients in the management and optimization of their logistics flows. We currently manage over 40 warehouses in more than 10 European countries.
We are committed to ensuring daily stock monitoring and continuous analysis of forecasts in order to reduce the risk of shortages and to assist you in limiting the impact on your business. Do not hesitate to contact our teams at SNECI to learn more about our support.
In conclusion, this semiconductor crisis is likely to last another two or even three years for various reasons: strong dependence on chip manufacturers, long and complex production process, increased demand from new sectors, etc. This is why it seems important that the European public and private players affected more or less indirectly by this shortage join forces to promote local production and reduce their dependence on the producers of these chips, who are mainly concentrated in Asia.