With more news of Toyota having to reduce vehicle production due to the worldwide shortage of semiconductors, we take a look at how this crisis started and when it is likely to end.
The motor industry’s current semiconductor shortage stems largely from the COVID-19 lockdowns of 2019 and 2020, combined with what many believe was a lack of long-term planning by vehicle manufacturers.
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During the global lockdowns, demand from car manufacturers dropped dramatically. Orders to chip producers were cancelled, factory production lines slowed or stopped altogether, and some semiconductor manufacturers even temporarily closed their facilities.
Then, as millions of people began working from home, demand for semiconductors surged during the second quarter of 2020—but this demand came from the technology sector instead. Manufacturers producing laptops, desktop computers, tablets, smart TVs and mobile phones dramatically increased chip orders, moving them to the front of the production queue.
By the time vehicle manufacturers began increasing production again towards the end of 2020, there was very little semiconductor supply available. Automotive manufacturers had effectively been pushed to the back of the queue and quickly exhausted their existing chip inventories. Before production for the automotive industry could resume, semiconductor manufacturers first had to fulfil huge technology-sector orders before switching production back to automotive specifications.
Electric and hybrid vehicles also require significantly more semiconductors than conventional petrol or diesel models. At the same time, semiconductor factories were transitioning to more advanced fabrication processes, further slowing production. The result was an enormous bottleneck in vehicle manufacturing, with some estimates suggesting that more than 10 million vehicles worldwide were affected during 2021.
Even entering the third quarter of 2022, manufacturers continued to face significant production delays.
- Volkswagen reportedly had an order backlog exceeding 540,000 vehicles.
- Jaguar Land Rover had an order bank of around 154,000 vehicles.
- Toyota announced a further reduction of approximately 100,000 vehicles in planned production.
- Tesla CEO Elon Musk famously described the company’s new factories as “money furnaces” because of the ongoing production constraints.
Mercedes-Benz CEO Ola Källenius also acknowledged the scale of the issue, stating:
“The semiconductor situation is very present and will be a challenge for the industry throughout this year and into next year.”
He added:
“We have not seen any signs yet that demand is going south.”
So, when will supply finally catch up with demand?
This remains a difficult question to answer because each manufacturer’s recovery largely depends on its own supply chain strategy.
BMW, for example, announced agreements with semiconductor manufacturers to secure the supply of several million microchips per year.
Ford, however, was hit particularly hard by the shortage and was forced to suspend production at several factories throughout 2021.
The normally best-selling Ford Fiesta suffered particularly badly, marking the first time in more than 30 years that Ford did not have a model among Europe’s top 10 best-selling cars.
Mercedes-Benz has also admitted that it needs to play a much more active role throughout its semiconductor supply chain as the industry transitions towards electric vehicles.
Källenius explained:
“We don’t stop at battery cell factories. We have to go through the whole value chain because so much is changing.”
His comments came shortly before the Society of Motor Manufacturers and Traders (SMMT) highlighted just how severely production issues had affected UK vehicle manufacturing.
At that stage, UK production figures were almost 100,000 vehicles lower than the equivalent point the previous year, despite modest growth during May.
Thankfully, established semiconductor manufacturers, along with new technology companies, are now investing heavily in expanding production capacity.
Toshiba, for example, announced plans to invest approximately £730 million ($1.09 billion) to double its semiconductor production capacity, with a new factory in Japan expected to open during 2025. While this investment is aimed at longer-term demand, it should help support the increasing number of microchips required in future electric vehicles.
Investment analysts have also suggested that supply conditions should gradually improve.
J.P. Morgan has stated:
“Semiconductor capacity takes time to build, which impacts supply, production and inventories. However, although current news continues to focus on shortages, we believe later this year the focus will begin to shift as automotive companies indicate improving supply.”
The report also notes that the semiconductor industry is naturally cyclical. Periods of sustained shortages are often followed by periods of oversupply.
Because the automotive industry generally relies on older-generation chips, additional manufacturing capacity for these products was not expected to come online until late 2022. Based on capacity expansion timelines, widespread oversupply for automotive semiconductors was expected to begin sometime during 2023.
Many industry experts agreed with this assessment, suggesting that production should gradually return to more normal levels during the latter part of 2023.
So, if you’re planning to buy a new car, you may still have needed a little patience before supply finally caught up with demand.
If you’re interested in how the semiconductor shortage has influenced used car prices, you may also find our guide on why diesel vehicles are still bucking the electric revolution useful. It explains how changing supply and demand continue to affect today’s used car market.
You may also want to read our article on the Government ending UK electric car subsidies, which explores how policy changes could influence future vehicle demand alongside ongoing production challenges.
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