Why did car-makers pause production while the PC supply chain coped with a surge? Because Apple and Samsung pay for priority access to product

Feature In February 2021, giant automakers Nissan and Honda warned shareholder 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 but a pandemic had not yet been declared, 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 from after 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.

But people who stay in need to remain productive and be entertained. Which made for a massive jump in PC sales around the world.

But while PC sales surged, passenger vehicle declined by 14 percent in 2020, according to analyst firm Canalys.

The geopolitical battlefield

While car sales cooled, surging PC demand and geopolitical forces heated up the market for semiconductors.

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

China/US tensions came along just as the semiconductor supply chain was already showing signs of strain.

“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 reckons the demand for semiconductors was on track to outpace foundry production for a while.

O’Donnell said:

KPMG’s Agarwal agrees, saying that the global shift towards digital economies, along with emerging tech like Artificial Intelligence (AI), the Internet-of-Things (IoT), Augmented Reality (AR) and Virtual Reality (VR), all put demands 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 over 3,000 chips, 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 3 systems, such as environment detection features, 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 lies at an awkward adolescent stage. It is not quite 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.

Lee explained further:

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

Big foundries like TSMC will re-allocate 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.

Silicon suppliers are also less willing to bend to meet car manufacturer demands 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:

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

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 or the lead time required to increase production of products destined for use in cars.

Argawal said:

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 suggests automotive companies need to get smart about the components they use, perhaps by choosing higher margin products that foundries are happy to prioritise.

As for consumers, Forester’s O’Donnell recommends companies and consumers adopt flexibility around their desired product or brand and potentially be willing to pay the inevitable higher prices for products.

Buyers of electronics have adapted their purchasing habits to alternative tech products, purchasing different brands or models. The wider electronics industry supply chain has meant that the public hasn’t heard much about shortages for PCs, phones and similar products.

Which doesn’t mean the shortages aren’t out there, just that they are harder to spot because there is more choice of products and more chance that suitable substitute products can be found on shelves.

For example, Marco Grieco Wang-Andresen, global chief operating officer at Lenovo, told The Register’s Paul Kunert that 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.” IDC research manager Jitesh Ubrani, told Kunert that desktops would take up the demand where notebook were in short supply.

Like everything else, COVID has forever changed the semiconductor industry and respondent consumer, manufacturer, and government. For the auto industry though, change was already in progress and came at the worst possible moment. ®

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