Semiconductor Shortage Constrains Vehicle Production

Semiconductor Shortage Constrains Vehicle Production

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December 13, 2021
Semiconductor Shortage Constrains Vehicle Production
A shortage of semiconductors has slowed auto production
receive and transmit information. The supply shortages that
and forced temporary closures of numerous assembly plants
have affected vehicle manufacturers, however, have largely
around the world. According to data from consulting firm
involved a different sort of semiconductor, logic devices
AutoForecast Solutions, North America lost production of
called microprocessors. These chips serve as the “brains” of
2.3 million vehicles in 2021 due to plant shutdowns. The
a system calculating and processing information.
effects of the semiconductor shortage on automotive supply
chains have drawn attention in Congress, at a time when
In motor vehicles, microprocessors are used for such tasks
Members are considering a variety of proposals to support
as gathering information about speed and brake cylinder
domestic semiconductor production.
pressure to manage antilock brake systems.
Microprocessors are usually embedded within larger
Semiconductor Use in Vehicles
assemblies known as electronic control units, which are
Recent trends in vehicle design, including vehicle
central to the functionality of power trains (four-wheel
connectivity, electrification, and a growing array of
drive, engine, transmission, fuel pump), chassis and safety
autonomous features, have increased the number and cost
(antilock braking, airbag, suspension, backup cameras),
of semiconductor components used in the average
body and convenience (ventilation, lighting, automatic
passenger car, sport utility vehicle, or pickup truck. As
seats), infotainment (audio and video systems,
shown in the top of Figure 1, recent estimates by Goldman
connectivity), and ADAS applications such as lane
Sachs, an investment bank, show today’s vehicles employ
departure warnings.
about 40% more semiconductor devices than those made
prior to the COVID-19 pandemic in 2019. The increasing
Most microprocessors used for automotive applications are
shift toward electric vehicles (EVs) and advanced driver
manufactured using older chip designs. For several decades,
assistance systems (ADAS) is also increasing the cost of
semiconductor performance has steadily improved as
semiconductor components used in vehicles. The bottom of
engineers have shrunk the size of core electronic features,
Figure 1 illustrates the additional electronics costs
characterized in the industry by the term “process node”
associated with an EV having ADAS features like the Tesla
(measured in metric length, nanometers or nm). Mature
Model 3, which incorporates 3.6 times as much
technology, also referred to as legacy chips, is generally
semiconductor value as the average internal combustion
characterized as having process nodes above 10nm, with
vehicle in 2017, according to estimates by Kearney
bigger numbers indicating older technology (10-180nm+),
consulting group.
while leading-edge technology is often regarded as being
below 10nm. These legacy chip designs are reliable,
Figure 1. Use of Semiconductors in Light Vehicles
effective, and inexpensive. However, automotive chips
must meet higher quality standards, and they provide lower
margins for chip manufacturers than the leading-edge chips
that are critical for many advanced and emerging
applications. Hence, chip manufacturers are often hesitant
to invest in mature technology, such as by building new
facilities to fabricate chips for automotive uses, which
accounted for 10% of semiconductor sales in 2019,
according to the Semiconductor Industry Association.
Supply-Chain Vulnerabilities
As chip performance has improved with miniaturization,
the cost and complexity of the manufacturing process have
substantially increased. This trend has driven many chip
Source: CRS, adapted from Goldman Sachs Investment Research
manufacturers that had previously both designed and
(top) and Kearney analysis (bottom).
produced their own chips (also known as integrated device
Note: Light vehicles include cars, sport utility vehicles, vans, and
manufacturers, or IDMs) to outsource the production of
pickup trucks.
their designs to contract manufacturers (often referred to as
foundries). Over time, the foundry market has become
dominated by a few large companies located primarily in
Most semiconductors used in personal vehicles are of the
Taiwan and South Korea.
type known as discrete/analog/optoelectronic (DAO)
devices, which are typically used in sensors and which can
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Semiconductor Shortage Constrains Vehicle Production
An estimated 70% of all the microprocessors needed for
shortages have led many automakers to form partnerships
vehicle electronic control units come from a single
directly with chip suppliers. In October 2021, General
chipmaker, Taiwan Semiconductor Manufacturing
Motors reached an agreement with semiconductor device
Company (TSMC). Nevertheless, the automotive industry
supplier Wolfspeed to secure a supply of chips needed for
accounts for only 3% of TSMC’s total revenue, as
EVs. In November 2021, Ford Motor Company and
estimated by IHS Markit, an analytics firm. Even though
GlobalFoundries announced a “strategic collaboration” to
vehicle manufacturers have many suppliers of electronic
advance domestic manufacturing of chips for Ford.
control units, those supplier networks rely mainly on one
producer of microprocessors. This exposes the entire
Additionally, many automotive companies are changing
network to disruption if that manufacturer encounters
their buying strategies. Formerly, they typically ordered
production issues. Further, suppliers of automotive
electronic components using just-in-time buying strategies
components and systems face cross-industry competition as
to avoid holding stock. New long-term contracts are being
foundries weigh how to allocate manufacturing capacity
requested from chip suppliers to allow them to increase
among various types of chips, including some with greater
investment in research and expansion with greater
demand and some which offer greater profit potential.
confidence. For example, semiconductor supplier
Microchip began prioritizing shipments for customers who
These supply chain vulnerabilities became apparent during
committed to 12 months of non-cancellable orders versus
the global coronavirus pandemic. Initially, anticipated
the historical 90-day cancel period for such orders.
declining consumer demand led suppliers of automotive
systems to reduce orders with chip makers. Accordingly,
Legislation
chip manufacturers allocated capacity and inventory to
At the start of 2021, the Creating Helpful Incentives for the
industries experiencing rising demand due to the increasing
Production of Semiconductors (CHIPS) for America Act
use of telework and online learning. As vehicle demand
was included in the National Defense Authorization Act
recovered in the latter half of 2020, automotive suppliers
(P.L. 116-283). The CHIPS Act authorizes incentives for
were confronted with long lead times in acquiring
the construction, expansion, and modernization of domestic
semiconductors as chip makers tried to keep up with
semiconductor facilities and equipment. In June 2021, the
demand across many industries. The situation was
Senate passed the U.S. Innovation and Competition Act (S.
exacerbated in early 2021 by severe winter weather in
1260), which would appropriate $39 billion over the period
Texas affecting two major semiconductor component
FY2022-FY2026 for a fund to expand semiconductor
suppliers, NXP and Samsung, and a fire at another
capacity authorized in the CHIPS Act. Of the $19 billion
important supplier, Renesas, in Japan.
that would be available in FY2022, the bill would allocate
$2 billion specifically for the production of “mature
Expanding Legacy Chip Capacity
technology nodes.” The bill would direct the Secretary of
In response to recent shortage-induced impacts and
Commerce to classify which process nodes qualify as
increasing demand across industries, IDMs and foundries
“mature.”
have committed $382 billion to expanding capacity and
diversifying regionally. However, IHS Markit estimates that
Considerations for Congress
only 6% of the new expenditure will be relevant for the
As Congress considers additional legislation to promote
legacy chips needed in the automotive industry. Many such
domestic semiconductor production, considerations related
chips are produced in facilities employing older equipment
to automotive supply chains include the following:
able to process only 200mm (8-inch) silicon wafers rather
than the larger 300mm (12-inch) wafers processed in newer
 Is future automotive demand for semiconductors
plants. Equipment to make 200mm chips is no longer
sufficiently clear for the federal government to be able
readily available.
to allocate investment appropriately to particular
technology nodes?
Another big risk facing chip manufacturers is choosing the
 How will the definition of “mature technology node,”
wrong technology and process to invest in, especially as
as determined by the Secretary of Commerce pursuant
mature technology comes with the risk of earlier
to the CHIPS Act, impact industries reliant on mature
obsolescence. Typically, building a semiconductor
semiconductors, including the automotive sector?
fabrication plant takes two years or longer. Mindful of their

industry’s traditional boom
After the definition of “mature technology nodes” is
-and-bust cycles and concerned
established, will federal support for such technologies
that what appears to be a long-term increase in demand
be limited to the allotted $2 billion, or may a portion of
could be suppliers of automotive components and systems
the additional $37 billion authorized in the CHIPS Act
placing multiple orders to build inventory, foundries are
be used for this purpose?
hesitant to invest in capacity expansion to manufacture
chips for automotive applications without commitment
 Is there a risk that automotive technology will migrate to
from their customers.
advanced semiconductor nodes, which could make new
facilities to produce legacy chips obsolete?
New Relationships and Buying Strategies
Traditionally, auto manufacturers have had little visibility
Manpreet Singh, Analyst in Industrial Organization and
into the operational risks in their supply chains beyond the
Business
“first tier” suppliers of assembled electronics where
semiconductor manufacturers usually reside. Recent
IF12000
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Semiconductor Shortage Constrains Vehicle Production

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