The disruption of supply chains has created a shortage of chips, forcing automobile makers to slow down production. How does the global chipmaking industry work, and how did similar shocks play out earlier?
Mercedes-Benz India has recently issued advertisements appealing to potential customers to bear with “a short waiting period” for vehicle deliveries. It’s an unusual request for the the German luxury carmaker — but it is not alone in asking customers to be patient.
Wait times for cars are currently among the longest in recent times, and a shortage of critical parts such as semiconductor chips are being cited as a key reason. Both global and Indian manufacturers have reported production issues linked to availability of chips, and been forced to apply brakes on production.
Why is this happening?
A common component across cars, electronic goods, medical devices, and smart appliances is the integrated circuits (IC) chip. ICs are the basis of all modern electronic equipment, and the chip is their brain and nerve centre. The circuit is essentially an aggregation of electronic components — resistors, transistors, capacitors — stuffed into a small silicon chip, and connected together to perform a single or multiple functions.
Before the Covid-19 pandemic, about a trillion chips were being manufactured on average globally every year. That’s about 120 chips per person — which would seem like a lot, considering only a small percentage of the global population uses high-end connected items containing many chips. But the chip shortage today has a lot to do with the pandemic — and how it changed consumer behaviour.
As country after country went into lockdown, people ended up buying more computers, phones, and gaming devices as they stayed at home. And since factories were shut, automakers cut down on chip purchases. This fundamentally reshaped supply and demand.
Now, as demand from automakers comes back on stream, chip companies are scrambling to adjust production and supplies to sectors such as automobiles.
Carmakers use chips in everything from power steering and fuel injector sensors to navigation systems and parking cameras. As cars get ‘smarter’ and more ‘connected’, electronic parts and components today account for 40% of the cost of a new internal combustion engine car, up from less than 20% two decades ago. Chips account for a bulk of this increase.