The average analysis of the current dismal situation in the automotive industry which has left manufacturers scrambling to find parts for their vehicles points the finger to the pandemic. Arguments range from the shutdown causing shipping and supply chain issues to the high demand from people living inside for new consumer electronics.
While these certainly played a part in the current predicament, they are by no means the single actuator. The pandemic’s effect on the airline industry, for example, can be pinpointed to the global shutdown of borders. In the semiconductor industry, however, there were clear indicators that a shortage like this was on the horizon. The pandemic was just the final push it needed.
The current situation is already hectic. Vehicle manufacturers are scrambling to little avail to come up with solutions to smooth the shortage. Ford and GM have both attempted to build trucks without certain parts. Ford continued to build the F-150 trucks without specific IC containing parts, with the goal of adding them once they became available.
The company put out a statement on the topic March 18, "Ford will build and hold the vehicles for a number of weeks, then ship the vehicles to dealers once the modules are available and comprehensive quality checks are complete."
GM made a similar statement, “When there is a shortage of semiconductors that impacts production, in some cases we intend to build vehicles without certain modules and will complete them as soon as possible...This will help us quickly meet strong customer demand as more semiconductors become available. Several of GM’s plants have recently utilized this process and we will complete those vehicles as soon as possible.”
The effects of the shortage are already very noticeable across the country. According to Detroit Free Press, the Wilson Ford in Saginaw is down to just 10 F-series trucks when they normally have 150-180.
As the founder of Topmarq , a luxury used vehicle marketplace, I have started to see rising prices across the board on used vehicles as new car supply shrinks. We have Tundras that are skyrocketing in price and used Ferraris that are now selling for more than original MSRP. It’s a crazy time for the industry yet it’s very difficult to find information beyond just the current state of affairs.
Anyone who has worked near or in the semiconductor industry could tell you that sourcing chips has been one of the biggest concerns in building electronics for the last 10 years or so. When I worked at Axon, a camera manufacturer, we would constantly be losing stock of our main processor to other very large companies like Sony who would buy up millions of chips at a time. It was a constant fight to ensure that the people assembling the cameras would have all the necessary parts. That was almost 4 years ago.
What’s causing the shortage?
There are a few aspects of the IC (integrated-circuit) industry that make it especially prone to issues like this. Apart from all the obvious reasons with the pandemic, this issue is really quite rooted to the semiconductor industry as a whole.
Making IC’s is no simple task
One of the largest hurdles in the way of just turning on more production of IC’s is that building them is incredibly difficult. In other industries, a manufacturing plant can often go from building one thing to another quite speedily. The pandemic saw auto manufacturers build ventilators and clothes shops build masks. In war times production becomes focused on building tanks and planes. It isn’t an easy process, but the mechanisms and the lines can be updated to build the new products within reason.
That magic really doesn’t exist in the IC industry. Sure they can go from making one IC to another with some ease, but no factory that doesn’t build IC’s will ever be able to start making them. The reason is they require incredibly precise machinery, which is how we have chips that have 7 nanometers (nm) or 7 billionths of a meter features.
A silicon wafer of hundreds of copies of a single IC - each small rectangle will be cut away and put into a package for use - being probe tested after manufacture
These machines don’t come cheap, and they have to be maintained in an ultra-clean environment to ensure no contaminants get on the silicon wafers (what IC’s are made of) as they go through the process. Intel, one of the leading manufacturers of processors has committed to building two new state of the art fabs in Arizona to the tune of $20 billion. That’s $10 billion per fab. Prices in the range of $4 billion to $10 billion are considered normal.
All of this results in it being very difficult to get into the industry at all, and makes the timeline for expansion for even the largest companies quite prolonged. You can’t just set up a site like this in a year. So if the manufacturers don’t forecast demand well enough, it takes several years to catch up.
IC’s are not easily interchangeable
Another major hindrance in the semiconductor industry is that the millions of different parts are not easily swappable.
In construction you might have a favorite supplier for one part, but could ultimately source it from another should you really need. That’s because many components used to build houses have equivalent swappable parts made by different manufacturers.
That can be true in the semiconductor industry but only for the most basic parts. They are called the ‘passive’ components and include things like resistors, capacitors, and inductors. These are generally swappable if you find another option with similar characteristics for your application.
Image of a printed circuit board with resistors and capacitors - the small rectangular parts with just 2 connections - and larger IC’s - the black boxes with many connections.
As soon as you move to an IC and even more so a processor, all bets are off. The number of connections, functionality over temperature, feature sets, and more all become very important and vary wildly by manufacturer. To design in a new chip could take redesigning a significant part of your product.
That’s not a great option for most companies.
Demand for IC’s per unit sold has skyrocketed
Even in a world where IC’s were easy to build, we would likely still have troubles keeping up with the skyrocketing demand for them. 15 years ago you might interact with a few IC’s here and there throughout your day. Your computer might have had 2 or 3 major chips on it. Your toaster, though, was just basic circuitry.
Today, the world is very different. Sure your computer probably has 100 specialized chips on it now, but the biggest change is the number of devices that now contain IC’s. That toaster probably uses 5 chips to handle power, user input, and heat transfer now. Anything ‘smart’ has at least a main processor/controller + a wifi/ble/zigbee controller + power controller. If you had X-Ray vision and could look around the room you’re reading this in, you would be baffled by the number of chips surrounding you.
What’s the outlook?
The point of making these trends in the industry clearer to those outside of it is to provide insight into the future. If you look at the semiconductor shortage as a blip in history due to the pandemic - like you might the lull in air travel demand - you could argue all will be well by the end of the year.
In truth, the pandemic exposed a weakness that has long been known within the industry and that will in no way go away overnight. The industry was behind 4 years ago, and it’s further behind today than it was.
Even the leaders of the industry see long recovery horizons. TSMC CEO says they hope to offer additional capacity for meeting demand in 2023, while Nvidia CFO believes they’ll be able to support growth starting in 2022.
As we continue to build out more tech-focused vehicles and eventually make our way to fully autonomous options, demand for semiconductors will remain at all time highs with the manufacturers struggling to keep up.
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