Car industry confident chip crisis will ease by end of 2022

4 months, 2 weeks ago - 13 February 2022, autocar
Car industry confident chip crisis will ease by end of 2022
Consensus says semiconductor supply is set to normalise - but it's not over just yet

The global chip shortage that has curtailed car production over the past 12 months will ease by the end of this year as supply normalises, according to consensus within the industry.

However, there’s plenty of pain for new-car buyers to work through in the next few months as order banks continue to grow and manufacturers keep their focus on more profitable models.

It should have been a golden year. As economies recovered from the pandemic, customers with greater spending power than usual clamoured for new cars. But reduced supply from global chip fabricators put the kibosh on that, forcing car makers to choose which models to make, which customers to satisfy and even which technology to keep and which to remove.

“Last year, we spent a lot of engineering and management resources solving supply-chain issues, rewriting code, changing our chips, reducing the number of chips we need,” said Tesla CEO Elon Musk last month. “It was chip-drama central.”

Manufacturers should have made another 9.6 million cars last year, estimated analyst company LMC Automotive.

LMC prides itself on accurate production forecasts but was forced to make cut after cut on its prediction of a better 2021 after a woeful 2020 as the impact of the chip shortage bit harder.

It has estimated that the worst hit was Ford, which it reckoned lost 1.26 million units globally, followed by the Volkswagen Group at 1.15m and General Motors at 1.09m.

In Europe, sales were down 1.5% from a pandemic-hit 2020 and by a whopping 26% from the 2018-2019 average, according to LMC.

This year, however, LMC calculates that the production volume lost to the chip crisis will be halved to 4.8m, as car makers get their hands on more of the micro-computers that control all manner of elements in the car.

Demand is still outstripping supply, and that's particularly acute in mature markets [like Europe and the US],” said LMC managing director Pete Kelly earlier this month.

Customers are going to have to wait some more.

Right now we have the biggest order bank that we’ve ever had. If there were free supply, I think the industry would be booming,” Kia UK boss Paul Philpott told Autocar in January. “People have money to spend.

Kia and its sister brand Hyundai were actually among the big winners last year as they navigated chip shortages better than rivals.

The Hyundai Motor Group was Europe’s biggest gainer last year, selling 1.02m Hyundai, Kia and Genesis cars, up 21% on the year before to put it ahead of the Renault Group, according to data from European automotive lobby group the ACEA.

Toyota also did well, boosting sales of Toyota and Lexus cars to 760,178, up 9.6%.

Hyundai Motor sales should return to pre-pandemic levels this year, vice president Gang Hyun Seo said in late January, predicting a return to normal chip production in the third quarter of the year.

 The chip crisis has also been navigated well by the Chinese car industry in general.

“China light vehicle production is starting to outpace retail sales, indicating the industry there is getting a grip far more than US and Europe,” said Kelly.

That's filtering through into good supply for SAIC-owned MG, whose average monthly sales grew throughout the year to reach 30,600 in total, putting it above Citroën, Renault and Honda.

The crisis was manageable if you were able to shuffle chips between brands in a wider group, prioritising high demand and high profit sectors, such as SUVs, and ignoring the entry models.

Luxury brands linked to wider groups – such as Bentley, Ferrari, Lamborghini and Rolls-Royce – all posted record sales for the year.

Entry-level trims or models, meanwhile, were hard to come by. “We’re consciously not allowing customers to order lowest-value derivatives,” said Jaguar Land Rover chief financial officer Adrian Mardell recently.

The trouble for JLR was that it’s all pretty high-value. “We have little margin of manoeuvre between mitigation between lower-end cars and high-end cars, because we only have high-end cars,” said JLR CEO Thierry Bolloré on the same call.

JLR said it has a huge 155,000 order backlog amid the chip shortage, with orders for the Land Rover Defender currently at 37,000.

Finding another source for chips was “much more complicated” when you rely on sophisticated chips, Bolloré said. However, the chip supply affected all types of chips, even the “very boring” ones, explained Musk. “Like the little chip that allows you to move your seat back and forth. That actually was a big problem,” he said.

The problem was exacerbated by strong demand for all kinds of chips, according to a recent survey of chip producers and consumers by the US Department of Commerce. It found that demand was 17% higher from 2019 to 2021 as consumer goods ranging from cars to mobile phones and video-gaming equipment packaged more chip-hungry technologies.

“This semiconductor shortage is the result of a significant mismatch in supply and demand,” said US commerce secretary Gina Raimondo, adding that the number-one issue was insufficient capacity in fabricator plants.

That’s now being tackled as a matter of urgency by Europe and the US, who want to reduce dependency on Asia for its chips. The European Union even introduced the European Chips Act in order to subsidise local development of chip plants, with Intel one manufacturer indicating that it’s on board.

That new capacity won’t come through this year, but providing there are no new complications (a new Covid-19 variant, for example), car supply should return to some kind of normalcy by the end of 2022.

“The toilet paper problem”

Musk reckons that part of the chip problem has been hoarding. Just like people hoovered up essential items in the early days of the pandemic, some companies did the same with chips, he claimed.

“I think there's some degree of the toilet-paper problem,” he said in January. “There wasn't really a tremendous enhanced need for ass-wiping; it's just people panicked." 

New chips that can do more and reduce the overall chip count will solve the problem going forward. “The next chip can do the same thing with less diarrhoea,” Musk said, perhaps pushing the analogy a bit too far.

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