SEMICONDUCTOR CHIP SHORTAGE

BY BRAD BREWER

It was around December 2020 when we rst started to hear rumblings of a semiconductor chip shortage. Before that, semiconductor chips were never really talked about in mainstream conversation. Then, we heard it wasn’t that bad, that it would likely only affect vehicle production for a short period, as chipmakers turned their production back toward the automakers. Lead times of six months are often required, as the nanoscopic circuitry on a chip is printed on silicon substrates in a series of painstakingly long production steps that takes weeks. e shortage only became acute following a chain of unrelated events that limited supplies of raw chip wafers right at the source. First, a winter cold snap caused rolling blackouts at Texas chip fabs operated by In neon, NXP, and Samsung, before a freak re in March at key Japanese supplier Renesas compounded the problem. en, the COVID-19 outbreak brought downstream supply to a halt in Malaysia and Vietnam, a low-wage hub where chips are packaged into nished products for nal shipping.

Some predicted a devastating result with as many as 9.4 million cars, or more than a tenth of the industry’s pre-pandemic output, possibly being eliminated from production plans. “Because of a 50-cent chip, we are unable to build a car that sells for $50,000,” said Murat Aksel, head of procurement for Volkswagen Group.

Most people seem to forget that when it comes to the electronic circuits that power our everyday lives, the automobile is at the same time the world’s most expensive consumer good and also the item that runs on the cheapest possible semiconductor chips.

Estimates of how many chips are in a vehicle today are hard to come by and depends on who you talk to. Estimates range between 300–500 per vehicle depending on options, but automakers aren’t really forthcoming when it comes to con rming chip counts per vehicle. Dozens of chips found in everything from electronic brake systems to airbag control units tend to rely on legacy technology, often well over a decade old. ese employ comparatively simple transistors that can be anywhere from 45 nanometers to as much as 90 nanometers in size, far too large and too primitive to be suitable for today’s computers or smartphones.

When the pandemic hit, replacement demand for bigticket items like new cars was pushed back while sales of all kinds of home devices soared. When the car market roared back months later, chipmakers had already reallocated their capacity. Why build legacy chips for the automakers when the tech market wants cutting-edge smaller and faster chips?

Now, these processors are in short supply, and chipmakers are telling car companies to wake up and nally join the 2010s. If semiconductor suppliers like Intel and Qualcomm have their way, however, the days of the auto industry relying on these cheap commodity chips are numbered. Carmakers have bombarded Intel, Qualcomm, and other manufacturers with requests to invest in brand-new production capacity for semiconductors featuring designs that, at best, were state-ofthe-art 10 years ago. Intel came to the auto show to convince carmakers they needed to let go of the distant past. Rather than spending billions on new ‘old’ fabs, the automakers need to spend millions to help migrate current module designs to more modern ones. e brutal cost pressure carmakers exert on their suppliers, which source the chips for their various components, is undoubtedly part of why the processors they use tend to be bulk

commodity products. But it isn’t the only one: Reliability plays a signi cant concern. Most systems in cars are safety-critical and need to perform in practically every situation regardless of temperature, humidity, vibrations, and even minor road debris. With so much at stake, tried-and-true legacy is still better than cuttingedge smaller and faster.

Unlike Intel, Qualcomm cannot directly help by investing in the expansion of capacity. Instead, the U.S. company is a fabless chipmaker, which relies on dedicated contract manufacturers called foundries that build its semiconductors for it. Unfortunately, that’s precisely where the bottleneck is most acute. “For the foundries, investing in the old technology is much less attractive because sooner or later, there will be a migration to the new technology,” Enrico Salvatori, president of Qualcomm Europe, said in an interview.

He is also working with the car industry to accelerate the transition, but he concedes it’s not an easy x. “ e new technologies are not pin-to-pin compatible; it’s not plug-and-play,” Salvatori said. “You have to redesign the circuit, build a new board that might have to be recerti ed; maybe there’s some impact on the mechanical side that then could a ect the car’s chassis. So, there is a domino e ect of action needed.”

As if the global pandemic wasn’t enough of a negative e ect on the automotive sector, but for the bulk of 2021, the semiconductor chip shortage has heavily impacted automotive production. It is projected to cost automakers upward of $210 billion in losses this year alone. If being completely honest, most would also agree no one really knows when the chip supply might begin to catch up with demand, with estimates ranging from as early as mid2022 to 2024 or even later.

Government and large eet accounts are essential to all the automakers, especially the big three, but let’s not kid ourselves. e automakers must do what will pro t their shareholders, and moving chips around to build high-pro t trucks and SUVs is likely the rst choice. at said, they also want to ensure public safety has vehicles to do their vital work, so special priority is being given to building police vehicles.

Samsung, the massive South Korean company, will invest $151 million in chip production through 2030, according to a report from Reuters, which comes as South Korea just announced a new round of loans and tax breaks for domestic chipmakers. e country will increase its tax breaks for those companies from a planned 3% to 6% from Q3 2021 to 2024 while also handing out $883 million in loans.

“Countries worldwide have entered a erce competition by reorganizing supply chains around their own country,” said South Korean President Moon Jae-in. We need pre-emptive investments to strengthen the domestic industrial ecosystem and lead the global supply chain to make this opportunity ours.” Samsung is in the process of building a third production line at its existing plant near Seoul to become the world’s largest chipmaker by 2030.

General Motors CEO Mary Barra recently commented on the impact of the computer chip shortage, acknowledging that the company was recently hit hard, but noted that she expects “improvement in the fourth quarter.”

“In the third quarter, we were hit maybe harder than most because some of the speci c facilities in Malaysia were heavily impacted by COVID,” Barra told FOX Business correspondent Grady Trimble ahead of the company’s two-day investor event in suburban Detroit. “We had a team of people there. We shared our safety protocols to enable them to get people back to work safely, and that’s why we have con dence as we move forward [that] we’ll start to see more and more recoveries.” She then noted that she anticipates continued improvement into 2022. Barra also stressed the importance of making sure the company has a “strong supply” long term “because we see tremendous growth.”

Barra also discussed the electric vehicle push on Wednesday. e Detroit automaker promised to double its annual revenue by 2030 with several new electric vehicles, pro table gas-powered cars, and trucks, as well as services such as an electronic driving system. Ultra Cruise, GM’s next generation of the electronic hands-free driver-assist system, will be able to take on 95% of driving tasks. e system is expected in selected Cadillac luxury vehicles in 2023, according to the company.

“GM is transitioning from an automaker to a platform innovator,” Barra told Trimble. “We have some of the most beautiful vehicles we’ve had on the road in my career, but then also being able to have a complete software and services business on top of that opens up tremendous growth with a very di erent margin structure,” she added.

GM plans to spend $35 billion to roll out more than 30 new battery vehicles worldwide by 2025. e company has set a goal of selling only electric passenger vehicles by 2035, and Trimble noted on Wednesday that the company is still on track to meet that goal, according to Barra. More than half of GM’s North America and China factories are expected to be capable of making electric vehicles by 2030, according to the company.

General Motors Co. said it expects the production-snarling semiconductor shortage to last into next year, a view that weighed on its stock price even after reporting better-than-expected earnings for the third quarter. “It will linger into next year, and right now, our feeling is that we’ll be in much better shape in the

second half of 2022,” Barra said in an interview with Bloomberg Television. e ip side of lower production volumes is higher vehicle prices due to depleted inventories. at helped lift GM’s revenue 10% in the rst nine months of the year to $93.4 billion. e upbeat earnings came despite a previously announced 33% drop in sales volume for the quarter, stemming from low production at factories and thin inventory at dealers. Barra cited pent-up demand for GM’s sport-utility vehicles and trucks, characterizing the chip shortage as a “near-term” issue. She said that GM is working with chipmakers to ensure this supply chain glitch is not a recurring problem.

“Our third-quarter 2021 results clearly illustrate the strength of the underlying business that is funding our future, especially when you put them in the context of the calendar year,” Barra said in a letter to shareholders. “As a result, we now believe GM’s full-year results will approach the high end of our guidance.” e semiconductor chip crunch was the critical storyline for Stellantis as the automaker reported its vehicle shipments and revenues for the third quarter of 2021. As expected, the lack of chip supply dinged both numbers, although the automaker pointed to key vehicle launches in its Jeep brand as highlights. e company, which also counts Ram, Dodge, and Chrysler among its brands, reported shipments of 1.1 million vehicles, a 27% drop compared with the third quarter of 2020. ose numbers would have been better, according to a news release, if not for the limited semiconductor chip supply, which cut planned production in the quarter by 30%, or 600,000 vehicles. With fewer vehicles available to ship, revenues were also down. e company reported net revenues of $37.8 billion (32.6 billion euros), a drop of 14% compared with the same period a year ago.

Stellantis reported a 14% fall in third-quarter revenue on a Pro-forma basis after semiconductor shortages cut planned quarterly production by 30%, or 600,000 vehicles. “ e level of chip shortage was probably slightly higher than what we had expected when we last spoke to the market in August,” Chief Financial O cer Richard Palmer said, adding that the full-year total of lost production due to the chip shortage would top a previous forecast of 1.4 million units. But Palmer said the business has seen a “moderate” improvement on the chip supply situation this month compared to September. He expects the trend to continue through the fourth quarter.

Ford Motor Company plans to increase its short and longterm supply of semiconductor chips through a new partnership with GlobalFoundries. e Detroit automaker and New Yorkbased chip supplier announced the signing of a nonbinding agreement for a strategic partnership that aims to increase the supply of chips to Ford from GlobalFoundries.

O cials said the tie-up could eventually result in new chip designs speci cally for Ford and increased domestic production and supply of chips for the overall automotive industry. e companies declined to discuss nancial details of the agreement or how much GlobalFoundries will increase supplies to Ford in the near term. is collaboration does not involve cross-ownership between the two companies.

Mike Hogan, GlobalFoundries senior vice president and general manager of automotive, said the agreement is part of a multipronged approach for the company to improve the supply of chips to the automotive industry. “ ere will be some near-term expansion of capacity … but this is about building a di erent future,” Hogan said during the joint interview. “ e automotive industry is fundamental to our strategy.” e partnership comes as automakers such as Ford are still battling through a global shortage of semiconductor chips that has sporadically caused plant closures for the past year. It also follows the Biden administration urging companies to onshore manufacturing supply chains, including semiconductor chips. “ is agreement is just the beginning and a key part of our plan to vertically integrate key technologies and capabilities that will di erentiate Ford far into the future,” Ford CEO Jim Farley said in a statement. e reality is this; nothing can happen overnight. North American semiconductor chip manufacturers are rapidly trying to make up ground and increase capacity within the United States and reduce reliance on the Far East but let’s be honest, that takes years, not months. e automotive sector is at a crucial crossroads for electronic system designs. Invest in current legacy technologies because they are proven safe and e ective but outdated or redesign components to accept semiconductor chips the rest of the tech world is using. e answer is likely both, but at what rate, nobody knows. As 2022 is only weeks away, it’s possible things will improve as we move through Q1 and Q2, but any signi cant improvement would be di cult to imagine before 2023 at the earliest.