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Why did automakers stall while the PC supply chain coped with a surge? Because Big Tech got priority access

Cars are becoming computers on wheels tho manufacturers aren't tuned into the silicon innovation cycle

Feature In February 2021, giant automakers Nissan and Honda warned shareholders that revenue was set to fall. The cause of the imminent fall was not economic decline caused by the COVID-19 pandemic but a boom in demand for semiconductors that left them unable to secure the components they needed to make their products.

A cascade of similar announcements followed, along with factory closures, leading governments around the world scrambling to address the problem.

February 2021 also brought confirmation of massive surges in sales of PCs and other electronic devices. In the UK, for example, laptop sales jumped by 90 percent. In Asia, notebook computer sales jumped 12 points. Tablet computer sales broke out of a long slump. Even printers sold in numbers that hadn’t been seen for years.

And while shops sometimes ran out of PCs, electronics factories weren’t forced to shut down.

So why did one industry close factories and another thrive?

The scenario

To find the answers, revisit February 2020 when COVID-19 was on the move though a pandemic had not yet been declared, and Microsoft cut its sales forecast for Surface tablets and Windows original equipment manufacturer (OEM) licenses.

A month later, the US had stopped flights from most of mainland Europe, and nations around the world were creating massive stimulus packages and wage subsidies to protect their economies as working from home became the new normal.

Subsidies were needed because people who don’t go out don’t spend money with retailers, restaurants, entertainment venues or myriad other businesses. And people who stay in need to remain productive and be entertained. Which made for a massive jump in computer sales around the world.

Yet while PC sales surged, passenger vehicles declined by 14 per cent in 2020, according to analyst firm Canalys.

The geopolitical battlefield

As car sales cooled, and automakers reduced their orders for chips, surging PC demand and geopolitical forces took over and heated up the market for semiconductors. And it's not just chip dies caught up in the shortages: there is also a huge demand for the packaging and substrate materials, too.

KPMG Singapore supply chain and procurement partner Rakesh Agarwal told The Register looming US trade sanctions preventing technology exports to China had some unintended consequences. Firstly, the forthcoming sanctions forced companies to make advance purchases of electronics essential to 5G smartphones and other high-end products, effectively hoarding or stockpiling parts. At the same time, the American firms were unable to source chips made by China’s leading factories, thus complicating the supply shortage.

China-US tensions came along just as the semiconductor supply chain was already showing signs of strain, with assembly lines barely able to keep up with demand.

“This was happening before the pandemic, the pandemic threw fuel on the fire,” research firm Forrester’s vice president Glenn O’Donnell told The Register. He reckoned the demand for semiconductors was on track to outpace foundry production for a while. O'Donnell continued:

We want more gadgets, and it all has to be wired and talking to other things. Everything needs intelligence these days, except my Harley.

KPMG’s Agarwal agreed, saying that the global shift towards digital economies, along with emerging tech like artificial intelligence, the Internet-of-Things, and augmented and virtual reality, all put pressure on the semiconductor market, and that demand is expected to rise.

Automakers are another reason for increased demand. Cars today increasingly resemble rolling computers, as many comfortably contain at least 3,000 semiconductor components, and will need more in the near future.

Satya Ramamurthy, KPMG’s global co-head of public transport, told The Register he expects that within five years, one out of four cars on the street will be powered by electricity and/or autonomous, and will be used in closed or programmed routes, for example, within public transport systems. In ten years, he predicts, semi-autonomous level-three systems, which sport environment detection features and suchlike, will be the norm.

“The next generation of cars will be connected and software systems within the car will be key differentiators of value and user experience," Ramamurthy said. "Cars will evolve into a large, ‘intelligent’ and complex battery system on wheels with the replacement of Internal Combustion Engine (ICE) powertrains and the introduction of heavy technology/intelligence as part of autonomous capabilities.”

But while automakers plan to use more and more semiconductors, they’re not good at procuring them.

Awkward adolescents

The problem is the automobile is in an awkward stage of development. It is not a purely mechanical device, yet not fully an electronic gadget. The transport industry’s procurement practices also don’t match suppliers’ product development cycles.

“Supply chains are different for consumer electronics versus autos,” analyst firm Gartner’s Ben Lee, told The Register. He explained further:

For PC and smartphones, tech evolution matters. Those manufacturers care more about performance and less about price. They need high performance to compete with others. The lifetime of a product is also shorter, two years to replace a smartphone and three years to replace a PC.

It matters less for autos, they can handle slightly outdated tech. They care more about the security of the computer and less about the state of tech revolution. Tesla’s success has changed this a bit, but tech lags for automotive in general.

The slower pace of change in the vehicle world means that inventory levels of kit for cars are kept lower than for faster-moving products, such as phones and laptops. Some companies even keep zero inventory and rely in on-demand purchasing, said Lee.

Big foundries like TSMC will reallocate capacity to other buyers when an auto manufacturer says they do not want to pre-order product, leaving no stock to be had at any price when the automaker decides to start building vehicles again. So if a car maker cuts their chip orders at the start of the pandemic, they are unable to secure supplies months later when sales pick up again. Silicon suppliers are also less willing to bend to meet car manufacturer vdemands because they order smaller quantities, and pay lower prices, than other buyers.

Car-makers also lack buying power. The world makes between 60 and 70 million new cars each year, and not all use the same chips. Samsung and Apple can each sell the same quantity of smartphones in 90 days and are willing to pay for the kit that makes their new flagship products stand out. Carmakers reliant on older kit, which makes less money for foundries, get less attention from foundries.

Lee added:

Are PCs suffering? The answer is yes and no. Yes, there is a semiconductor shortage, but overall, PC companies can get more chips whereas automobiles struggle to last minute get supply. They will have to wait one to two quarters.

KPMG’s Agarwal agrees that purchasing power plays a huge role in the shortage of chips in the automobile industry:

The challenge is that the profit margins offered by automotive OEMs are much less than those from other consumer electronic industries. Consequently, now that there is a shortage of semiconductors, automotive companies will naturally rank lower in priority in the eyes of the semiconductor companies.

He added that procurement practices in the automotive industry are not very different from other industries, inclusive of long-term contracts with nine to twelve-month procurement lead times.

At the start of the pandemic, when demand for consumer tech skyrocketed, car sales dwindled, resulting in vehicle manufacturers cutting component orders in early 2020. Abandoned semiconductor manufacturing capacity was quickly absorbed by the electronics sector and when car sales rebounded in Q3, product was already promised to someone else. Foundries had neither the capacity nor the lead time required to increase production of products destined for use in cars.

Argawal said:

The automotive industry is now experiencing a critical market shift. As carmakers increasingly prioritize next generation transportation technologies, automobiles are transitioning to become electronic devices.

This means the automotive industry faces increased competition in demand from all other industries. The repositioning puts them at a disadvantage when competing for semiconductor supply.

Just when automakers will be able to hit the accelerator is not clear.

Gartner has predicted semiconductor shortages will remain moderate to severe for the rest of 2021 and overall continue until the second quarter of 2022. TSMC has said shortages will continue until 2023.

While plenty of new semiconductor production lines are on the way thanks to big spending by Samsung, TSMC, and Intel and others, they’re years from producing product.

KPMG’s Agarwal suggested automotive companies need to get smart about the components they use, perhaps by reserving them for use in higher margin products that provide a better return for the car firm. As for ordinary folk, Forester’s O’Donnell recommended companies and consumers adopt some flexibility around their desired product or brand, or be willing to pay the inevitable higher prices for equipment.

Though people may have felt the shortage of video games consoles, PC parts, and similar products, the wider semiconductor supply issue may not be obvious to buyers. That isn't to say the shortages aren’t out there, just that they are harder to spot when it comes to appliances and the like because there is more choice of products and more chance that suitable substitute products can be found on shelves.

Marco Grieco Wang-Andresen, global chief operating officer at Lenovo, recently told The Register the IT industry was in an “odd period where the component shortage is resulting in everything that is able to be built is selling, notebooks and desktops." And IDC research manager Jitesh Ubrani told us that desktops would take up the demand where notebooks were in short supply.

Like everything else, COVID-19 has forever changed the semiconductor industry, and its buyers and governments. For the auto industry, though, change was already in progress and came at the worst possible moment. ®

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