There are signs of recovery in the beleaguered automotive supply chain, but the real relief is still a few years away.
Automakers have been among the hardest hit by supply disruptions of key raw materials and components over the past three years, even though the crisis was partly the result of their own actions.
Or inactions, to be more precise, in the form of cancellations of microprocessor orders in response to a slump in auto sales in the early months of the COVID-19 pandemic. When product demand began to increase unexpectedly later in the year, it was too late to recall those orders. Manufacturers of video games and other types of consumer electronics had already clawed back the capacity left on the table by automakers, and it would be some time before they got it back.
The result was a severe shortage of new and used cars on the market. In response to the chip shortage, automakers have been forced to cut new vehicle production by around 10.5 million units in 2021 and another 3.6 million in 2022.
Despite a generally pessimistic outlook for the automotive industry through 2023, there are signs of “stabilization” across several industry supply chain product groups, says Richard Barnett, chief marketing officer at Supplyframe. He sees slight improvements in passive and active microchip supplies, as well as power control systems and other major analog components.
Barnett describes the industry’s attempts to deal with persistent shortages as a game of Whac-a-Mole, whereby manufacturers manage to obtain one type of material while suffering a shortage in another. The problem, he says, lies in an inability to “look under the hood” of their supply chains – in other words, a lack of visibility by original equipment manufacturers of the complete bill of materials. . That’s why their recovery prospects look so erratic. “The pattern will continue to unfold in the first half of 2023,” he says.
Automakers have managed to ease some of the pain through forward buying of certain materials, but those actions have been offset by their disengagement from microchip demand and the ripple effect it has had throughout along the supply chain. Additionally, they have been caught off guard by an over-reliance on a just-in-time strategy to power production lines, which has left them without buffer stock to offset the pandemic-triggered supply shutdown.
“Often they were only notified of parts shortages because they weren’t getting shipment confirmation from suppliers, even those co-located with manufacturing sites,” Barnett says. “They were surprised two to three weeks and learned there was a six-month delay.”
Over time, OEMs began to reconfigure their sourcing strategies, in some cases going to secondary suppliers or buying as many parts as possible on the open market. But they continued to experience disturbances from ostensibly minor items on which they have no line of sight – the so-called “popcorn pieces” like diodes and resistors. Ford Motor Co. has warned investors that it will incur an additional $1 billion in supply chain costs in the third quarter of this year, with other major automakers expected to pick up similar costs.
The rise in popularity of electric vehicles has only worsened the plight of automakers. Between 1,800 and 2,500 individual electrical components go into an internal combustion engine, says Barnett. Electric vehicles typically incorporate double that number. And when those items are buried in sub-assemblies and sourced from beyond Tier 1 suppliers, “it’s very easy to have blind spots on, say, 100 ‘non-critical’ components that can still stop the production.”
That said, overall microprocessor delivery time has “greatly improved” in recent months, Barnett says. Where supply is blocked are components designed for specific vehicle platforms, which are tightly sequenced in limited volumes and difficult to coordinate with suppliers. Additionally, much of the new microprocessor capability expected to come online focuses on the “bleeding edge” of technology – the type of chips best suited for high-end electronics and cell phones, instead of the legacy systems found in most cars.
The real recovery of automotive supply chains is still three to five years away, predicts Barnett. And investments in boosting supply won’t start to have a significant impact on production until 2023 at the earliest. Meanwhile, manufacturers will need to continue to retool production lines to accommodate the manufacture of more electric vehicles, which are expected to dominate new car sales within a few years. They will be helped by a push to expand domestic chip production, as well as standardization of platform design across multiple vehicle models to reduce sourcing and assembly complexity.
“Each EV program allows OEMs to pull themselves together around standardization and reuse,” says Barnett. “This allows them to anticipate the problem by entering into more long-term agreements, direct supply and collaboration with semiconductor suppliers than ever before.”