Chip Shortage: The Impact on Car Manufacturing

The automotive industry continues to battle against the global shortage of chips that began during the Covid pandemic, during which time, the demand for new cars slumped, as people couldn’t go anywhere due to the lockdowns.

However, car sales rose very quickly when the travel restrictions were lifted, and this created a sudden demand for chips that far exceeded supply.

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When the pandemic was at its peak, automotive companies had to cancel orders for components across the board. Cars were left idle, and no-one wanted to buy a new vehicle. Then, as soon as the lockdowns were lifted, there was a sudden surge in demand.

Modern vehicles have thousands of chips to run the increasingly advanced in-car technology: they require software with even greater computing power. This was something vehicle manufacturers simply couldn’t meet.

How did the chip shortage start?

The semiconductors shortage initially started due to an increased demand for tech devices such as laptops, tablets and smartphones, at the height of the pandemic. This diverted the supply away from the automotive industry, where the chips were not needed.

Covid-related shutdowns at factories where semiconductors were produced, and the closure of international shipping ports made the situation worse. Supply chain problems are still not resolved. As a result, a number of vehicle manufacturers are overhauling their components supply chain as a workaround to alleviate the current shortages.

How is the industry solving the problems?

Tech firms are investing heavily in semiconductor production to try and ease the shortages. Toshiba plans to invest around £737 million to almost double its production capacity by building a new factory in Japan, with a planned opening date of March 2025.

Vehicle manufacturer BMW has signed a semiconductor supply deal with Inova Semiconductors and Global Foundries to secure a supply of millions of new microchips per year. They will be used for BMW’s smart LED lighting technologies in various models.

Earlier this year, the manufacturer had warned supply problems would continue and called for a “strong and coordinated response” across Europe.

Meanwhile, Ford is having to reduce production at eight of its factories in North America because of the chip shortage. Some factories are suspending production altogether, while others are temporarily stopping certain vehicles. The company says the chip shortage will contribute to volume decline this year.

Several of Ford’s factories were closed during 2021 due to the shortage, which has hit the manufacturer particularly hard. One of its worst-hit models is the Fiesta, a usually dominant car that has been knocked out of the top ten best-selling cars in Europe recently. This has been the first time in 30 years that a Ford vehicle hasn’t topped the list of best-sellers.

Impact of chip shortage on second-hand cars

The chip shortage has had a knock-on effect on second-hand car inflation. According to data from the Society of Motor Manufacturers and Traders, the number of pre-owned vehicles being bought more than doubled in 2021, with sales up by 108% compared with 2020.

According to Autocar, this has happened as a direct result of the chip shortage slowing down production of new cars. In many cases, buyers are facing much longer lead times compared to normal for a new vehicle. Some cars are being sold without non-essential features that depend on the chips.

Since the beginning of 2021, used car prices have increased by nearly 30%. Some models have gone up by as much as 70%, reflecting the surge in demand as chip shortages continue to impact the new car market.

Automobile manufacturers are also suffering problems with the supply chain for raw materials, such as resin and steel. However, reports last year of a potential shortage of automotive industry rubber products have proved unfounded so far.

Rubber manufacturers have accused the media of “over-hyping” the risks of a shortage of components as a result of the genuine shortages of automotive semiconductors.