Semiconductors: The Missing Piece on the Board

Semiconductors are indispensable for the world's automakers as they are used in a wide variety of vehicle systems, such as safety, navigation and entertainment.

But even though a chip is only one of the 90,000 pieces that a conventional car can have, delays in the production of these inputs has become a global problem, the end of which is not in sight, given the atypical disruption in the supply chain that has occurred following the onset of the COVID-19 pandemic.

When the health crisis began, the automotive industry anticipated a drop in sales and canceled orders because mobility was significantly reduced by the containment measures; in contrast, remote work increased demand for electronics, such as laptops, tablets, computers and other devices, which exacerbated delays in chip production.

But as restrictions were lifted — and we also saw how some industries that were called essential, such as food and beverages, pharmaceuticals and logistics companies (the last-mile deliveries) even increased their distribution capabilities — there was an increased need for new vehicles to maintain social distance, which has led to a reduction in supply in the market because cars are a more popular commodity than ever.  

In the automotive and fleet market, OEM order schedules are delayed by weeks or months and some automakers have full inventories of vehicles built without microchips, which will result in higher prices for parts and units in the retail and fleet market. It is worth noting that 80 percent of chip production is concentrated in Taiwan and South Korea, represented by companies such as TSMC, Samsung Electronics and SK Hynix; the US holds 11 percent of the market, where Intel is the largest participant, while Europe has 9 percent, although in reality there are few companies that satisfy global orders.

Taking this into consideration at Element Fleet Management, we have evaluated the risks and areas of opportunity in the supply chain to create solutions that help customers mitigate the risk around this issue, despite delays or cancellations. Telemetry is a key tool to achieve this, as well as our Xcelerate™ platform, which through artificial intelligence becomes an ally that allows us to analyze millions of data in a matter of seconds to identify vulnerabilities and design strategies that allow us to work hand in hand with customers and address their most critical needs around the optimal replacement point of the units.

With Xcelerate™, companies can access the fleet information they need, in real time, when and how they need it, through a technology platform and infrastructure designed for scale, speed and stability. This brings advanced analytics that provide information and intelligence to make fleet management more proactive and productive, leading to improved manager and driver experience. Also, through our strategic consulting teams and a customized procurement team, we have designed efficient replacement programs and new acquisitions to ensure minimal disruption to our customers' operations, ensuring maximum availability of their fleets.

According to estimates by Fitch Ratings Agency, the contraction in semiconductor supply could continue at least through the first half of 2022, although some specialists say that production will not stabilize at 100 percent for another two or three years, as demand is very high and there are more and more digital products that require chips, added to the fact that there are few factories in the world working at full capacity.

According to Bloomberg, data from some of the largest chipmakers show that lead times continue to increase, with some microprocessor lead times jumping from 10 weeks to 17. At the same time, demand for chips is expected to increase further as more people demand 5G technology and the vehicles themselves become more technologically sophisticated. However, scaling up the manufacturing capacity infrastructure will take years.

In addition, this situation has had a number of implications that have forced employers to cut production, reduce shifts and working hours, and even eliminate jobs in the automotive industry.

In the case of Mexico, the automotive manufacturing sector, which employs 946,000 people, has lost some 16,000 jobs  since the end of 2019, according to data from the Mexican Automotive Industry Association (AMIA). The Bank of Mexico also projected that assembly plant shutdowns, a product of chip production delays, could cost Mexico up to 1 percentage point of expected GDP growth by the end of 2021.

However, Mexico is not the only country facing this problem. U.S. automakers lost 2.2 million vehicles in 2021 and 575,000 industry jobs have been affected, while Germany is struggling to increase production, which has affected its economic recovery, and Japan has had to cut production.

All of this brings with it a significant price increase for the end-consumer, since the availability of units is reduced, creating shortages and affecting companies that base their production, distribution or sale of their products or services on their fleets.

Subcompact cars have been the most affected, as delays in the production of chips have forced automakers to prioritize the production of more expensive vehicles, such as pickup trucks and SUVs.

Data from the consulting firm IHS Markit reveal that prior to the pandemic, this segment represented 30 percent of total vehicle sales in the country, but last year it dropped to 25 percent. Those who cannot afford them are turning to the used car market, whose demand has also increased, as have prices.

The road to stabilize prices and inventory availability seems long, but so is the challenge of normalizing production. According to experts, to survive this storm, supply chains will have to adapt their processes to avoid falling into an economic crisis. Companies will have to look for new suppliers. Although the initial costs may be higher, many industries are now prioritizing the availability of vehicles and not creating disruptions in their production chains.

This means that companies can avoid potential bottlenecks and better control costs for vehicles that remain in service longer than planned. It is also advisable to review maintenance and replacement schedules to understand where the need is greatest, then invest in immediate inventory to protect the fleet in case backlog projections continue, not forgetting to diversify the customer base.

Opting for an expert fleet manager can help optimize productivity and generate savings. Such a manager could also do an in-depth analysis of what is required to weather this crisis, which will be with us for a long time to come. Telemetry and data are useful to achieve this, counting on a fleet manager as an ally to hoist the sails and come out ahead.