Here’s what’s cookin’ today in Transmission:
- Chip shortage revealing auto industry flaw that’s been around for decades
- Current state of Detroit remains positive amid shortage
- Industry news
Chip shortage revealing auto industry flaw that’s been around for decades
The semiconductor shortage is an ongoing issue that’s been disrupting the automotive supply chain since late 2020. During the pandemic, automakers cut spending on chips due to production halts and lack of demand. As OEMs resumed production, auto chip orders surged. Chip manufacturers had to balance fulfilling orders between automakers and tech groups like Apple or HP. Long story short, production capacity is still very tight, according to Taiwan Semiconductor Manufacturing Co. (TSMC).
Automakers from Germany, the United States, Japan and the European Union have all reached out to the Taiwan government in an effort to persuade Taiwanese manufacturers to allocate capacity toward auto chips.
Speaking on behalf of TSMC, Taiwan’s Economic Ministry told Reuters that the chip manufacturer will “optimize” the production process of chips in attempts to grow capacity. Orders from automakers will also be prioritized to meet high demand.
“Other than continuously maximizing utilization of our existing capacity,” said TSMC in a statement to Reuters, “Dr. Wei [CEO of TSMC] also confirmed in our investors conference that we are working with customers closely and moving some of their mature nodes to more advanced nodes, where we have better capacity to support them.”
The gist: Lean inventory doesn’t sit well with supply volatility. For decades now, the automotive supply chain has utilized just-in-time inventory strategies. Order what’s necessary to save on excess costs. Keep upstream supply providers on speed dial and only produce inventory when needed. But this shortage, as well as the pandemic, has been a wake-up call for supply chain managers.
I’m not saying that JIT models should necessarily be cut altogether, but rather OEMs should identify and mitigate risks in the current model. Increasing safety stock could be an answer to this problem, but assembly plants aren’t designed to hold large inventories.
Supply chain managers: Rethink the way your network is built. Flexibility is key when the normal processes in place fail.
Automakers are banding together to use the industry’s leverage over common suppliers to ask for long-term, strategic commitments. That won’t solve the immediate problem, but it’s the right approach. No individual OEM has the buying power to unilaterally demand extra chips, but together, the industry may be able to push its suppliers to invest in dedicated solutions for its needs.
In related news, Volkswagen (VOW3.D.DX) is seeking damages from Bosch and Continental after the automaker had to shut down plants across the pond in Europe in response to the low chip supply. VW has been working with suppliers to coordinate chip distribution and output but believes that both suppliers may have not ordered enough chips to meet delivery obligations. If this is the case, then Bosch and Continental would share the cost of production disruptions.
Current state of Detroit remains positive amid shortage
Freight leaving Detroit is at a three-year high for the month of January. Outbound tender volumes are up 23% compared to January 2020 and up 50% compared to January 2019. Rejections have remained relatively flat since the start of the year as automakers are quickly moving vehicles to dealerships and components to assembly plants.
Inbound volumes are up 16% compared to January 2020 and up 26% compared to January 2019, indicating that even amid production halts worldwide due to the chip shortage, automakers in Detroit are still churning out vehicles to restore pre-pandamic inventory levels.
So far no major assembly plants in Detroit have shut down, but as the shortage continues to take names, the Motor City could possibly feel some heat in the near future.
- BMW is having to simplify its vehicle portfolio as the automaker looks to invest in EV fleet expansion and return to the pre-pandemic operating margin target. The automaker is trying to cut excess costs including cutting features unused by customers and reducing engine variants. BMW’s finance chief Nicolas Peter told Reuters that because EVs cost more to develop than ICE vehicles and since they currently make up a small portion of sales, it will be tough to see large profits right away but the company is ready for the transition.
- Carmax (KMX.NYSE) is officially out of the new-car retail business. The company sold its last two dealerships, both Toyota stores, after 25 years of operation. The nation’s largest used-vehicle retailer is shifting energy to focus on expanding within the used-vehicle market and to develop its online sales channel. In response to the pandemic, dealerships have had to reevaluate the way they operate by expanding online services.
- The Mexican government has approved a request from 12 automakers that gives more time to meet the regional content guidelines put in place by the United States-Mexico-Canada Agreement. The list includes Tesla, Volvo, Volkswagen and Toyota. In order to meet the tariff-free incentive, automakers must ensure that at least 75% of components made in light vehicles are sourced from North America.
Like what you just read? Join the community! Sign up from Transmission and get insight, news and analysis regarding the automotive supply chain: https://freightwaves.com/transmission