Semiconductor shortages

James Norris, Senior Analyst, European Light Vehicle Production

11 March 2021

The EU plans to stack chips

The global semiconductor shortage has come at an extremely inopportune time, just as the European automotive industry struggles with the latest round of lockdowns a year on from the initial COVID-19 outbreak. One could argue, however, that this issue has been a year in the making. Understanding why will be crucial to avoid it happening again.

Starting from the original pandemic-related plant closures in March 2020, chip orders from automotive suppliers fell substantially at a time when chip demand for devices such as laptops, games consoles and TVs ballooned. As these orders came in thick and fast, car component suppliers reliant on semiconductors found themselves at the bottom of a very long list – a list with lead times usually in excess of three months, although current estimates put the backlog at closer to six.

The threat to vehicle production surfaced when sales recovered faster than expected over the final quarter of 2020, catching component suppliers off guard and clamouring to order the necessary parts. This was particularly problematic for automotive manufacturers who generally keep lean inventories, due to Just-In-Time systems. With low stocks of semiconductors and above-average waiting times for orders, European automakers, such as Daimler, Ford, Renault, Stellantis and VW Group, began to sporadically halt vehicle production, taking care to prioritise build of hot-selling new models where possible. As such, this disruption is expected to undermine European Light Vehicle production by almost 150,000 units in the opening quarter of 2021. Moving into Q2, further semiconductor supply shortages could see another 60,000 units of Light Vehicle output cut from automakers’ plans.

Over the second half of the year, we expect the supply of semiconductors to normalise and for OEMs to recoup most of the lost volume by keeping plants operational through traditional summer shutdowns, if necessary. Even so, any major delays to the chip supply recovery beyond Q3 could result in a further 200,000 fewer vehicles being produced this year, when measured against our current view.

The situation has exposed a weakness in European supply chains that the EU plans to address by supporting localised semiconductor and processor production as an Important Project of Common European Interest (IPCEI), which, in turn, could lead to €50 billion of targeted investment. Ambitious targets set by the EU to produce at least 20% of the world’s semiconductors in value by 2030 reaffirms this commitment. Importantly, it should improve semiconductor capacity and allocation, while allowing cost-conscious automotive manufacturers to keep lean inventories. The first boost to capacity will come from Bosch, a listed partner of the IPCEI group, which is set to start operation of a semiconductor and processor production facility in Dresden, Germany from the beginning of 2022.