The semiconductor industry is experiencing an overstocking dilemma that seems unimaginable in 2020-2022. However, the problem continues to intensify at an alarming rate.
Although the auto industry began to reduce production before the inventory surplus appeared, manufacturers still struggled to obtain enough chips to maintain production. This mismatch is puzzling: if there is a general surplus in the industry, why aren't these chips going to the industries that need them? If automakers continue to face chip shortages, reducing chip production may seem paradoxical. Admittedly, not all semiconductors are universal, but there are still some components that can be cross-used between the car and the chipmaker. Why stop production if there are components available?
Automakers will still face procurement challenges, both as much as the industry itself and the characteristics of the chips.
First, let's explore the significant differences between mobile phones and cars. Mobile phones are small, portable electronic devices that are used by almost everyone worldwide, and their prices range from $100 to $1,000, depending on the brand and features. Whereas, cars are large personal transportation that not everyone owns and can cost tens of thousands of dollars. Another significant difference is the number of chips needed to make a mobile phone versus a car.
Compared to most consumer electronics, industrial equipment, including automobiles, has a huge difference in time frames. For example, the iPhone 15 was released only a few months ago. Apple has been launching new phones on a regular basis for years, and so has Volkswagen.
Figure: Why is there a shortage of automotive chips?
The chip technology used in personal electronics is often more advanced than that of many traditional combustion vehicles. Electric vehicles (EVs) use a combination of legacy and advanced chips to enable innovative features and the functionality of other e-mobility devices. However, most cars still rely on legacy chips to run today, which are distinguished primarily by size, ranging from around 45 nanometers to 90 nanometers.
New types of advanced semiconductors are smaller in size, 3nm and 5nm, and original component manufacturers (OCMs) are constantly improving existing technologies to make them smaller. So why haven't automakers adopted these smaller chips? Why are cars still using older chips when faster, smaller chips are available?
The key factor is cost. From OCM to Original Equipment Manufacturer (OEM) to Consumer, cost is something that everyone has to consider. Cars are expensive, much higher than any personal electronics, regardless of brand or function. Despite being expensive, cars are easier to replace than mobile phones. Unlike mobile phones, consumers don't buy a new car every year. Both the automaker and the OCM are aware of this. Most consumers buy a car with the expectation that it will last for many years, even more than a decade. Mobile phones and other consumer electronics have a different lifespan.
Chip capacity, that is, what kind of chips OCM specializes in, requires input in raw materials, transportation and other costs. Most of the chips purchased globally each year are dominated by consumer electronics rather than the automotive industry. Despite the large number of semiconductors used in automobiles, with 1,000 to 3,000 chips per vehicle, automotive OEMs are buying far less inventory from OCM than consumer electronics OEMs are ordering. If a consumer electronics OEM is the largest buyer of components, the profits from their orders will offset capacity costs, making them more attractive.
In addition, the process of passing a certification audit for a new design also takes time, both of which add to costs. This is not the only reason for the shortage of automotive chips, but it is a key factor in the problem.
