13 July 2022 | 2 min read
“ Microchips are in many ways the lifeblood of the modern economy. They power computers, smartphones, cars, appliances and scores of other electronics. But the world’s demand for microchip has surged since the pandemic, which also caused supply-chain disruptions, resulting in a global shortage.” – NY Times
The gloomy economic outlook being sensed worldwide owes so much to different factors – yet the microchip crisis is undoubtedly one of them. Our era of IoT and connectivity demands a level of supply that seems constantly out of reach, and the automotive industry alone has faced disruption after delay thanks to the microchip shortage affecting our industrialized world.
At best, the chip crisis renders vehicles of all kinds far more difficult for consumers to purchase – and at worst, it causes even the most seasoned automotive OEMs to have to halt production at a time when productivity and economic output has never been more important to enliven.
Most concerningly, the chip shortage affecting both the automotive industry and the technology ecosystem at large seems to only catch marginal reprieves – never a full solution.
The question here arises: What has led to this microchip crisis, and what is being done to overcome it?
While the automotive chip shortage has undoubtedly had a big impact on the number of new vehicles entering the market, the entire technology industry is similarly being buffeted by these circumstances – from interactive entertainment to work computers and household electronics.
Yet with many industries recovering post-pandemic, why does the microchip crisis persist?
The ability to source microchips and control mineral resources is directly linked to dominance in strategic technology sectors, and the US and China currently have the widest margin of control.
While it’s easy to blame disruptors such as the growth of working from home or the effect of lockdowns in China, the world is also enduring significant supply chain woes.
Soaring demand versus a lack of rapid production techniques – indeed, POET Technologies CEO Dr. Suresh Venkatesan advises that advanced chips take over 20 weeks to produce – mean that even accelerating production methods today are only barely being felt in tangible results.
Production plant shutdowns and difficulties in obtaining the materials necessary for vehicles with even more IoT capabilities mean that the automotive sector has endured a difficult few years under the yoke of the global chip crisis.
After the 40% cut announced by the Japanese Toyota, Stellantis, and Volkswagen had to intervene in August 2021 to cope with the shortage of microchips. Stellantis was forced to stop production at two factories in France, in Janais and Sochaux. Volkswagen announced a production cut at the Wolfsburg factory, the German group’s main one.
And since fewer cars are being produced at higher prices, the leasing, rental, car subscription, and car sharing market is gaining in relevance.
However, further burdens are being felt not only in OEMs’ order books but in their bottom lines. The global chip crisis has fallen amid an era of evolution for automotive OEMs, as the demand to shift from internal combustion engine (ICE) vehicles to battery electric vehicles (BEVs) continues to add complexity to the conversation. Research firm AlixPartners, already recognising that the microchip crisis will cost the automotive sector $210 billion worldwide, has also stated that the increased IoT and technological complexity of BEVs will create more bottlenecks.
Necessity demands agility, and the automotive industry is turning the tide on the chip shortage not only through better forward planning but also by sidestepping certain restrictions.
For example, software in IoT elements of modern vehicles is being rewritten to use fewer chips for more functionality.
More predominantly, the reshoring of microchip production is being implemented in the United States and worldwide, solving immediate chip crisis woes by keeping production closer to home.
Expanding on the reshoring idea discussed above, the EU announced in February 2022 the European Chips Act.
This movement aims to centralise much of semiconductor production in European nations, in a bid to improve supply chain resiliency and mitigate the seemingly endless churn of the global chip crisis.
By 2030, the EU aims to more than double European semiconductor research, development and manufacture – leaping from 9% of global output to 20% by the new decade’s dawn.
Big tech businesses are echoing the positive stance the EU is taking against the microchip crisis too, with Intel investing $36 billion into developing European semiconductor production potential, with production coming online by 2027.
According to sources, Intel and the Italian government are discussing a total investment of $9 billion over 10 years from the start of the construction of the factory in the country. Rome wants Intel to clarify its plans for Italy before formalising a package of favourable conditions, especially regarding jobs and energy costs. Once an agreement has been reached between Rome and the American company on the action to take regarding this problem, the next step will be to decide in which area to begin with the construction of the Italian production facility.
Immediately, the global chip shortage remains a key area of concern, for the automotive sector and beyond. Yet hope is on the horizon, and resources are being put into action – causing many to feel optimistic that a difficult few years may soon give way to a reality on the upswing.