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
- Reference: 1622534287
- News link: https://www.theregister.co.uk/2021/06/01/autos_and_the_worlds_semiconductor_supplies/
- Source link:
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, [1]laptop sales jumped by 90 percent . In Asia, notebook computer sales jumped [2]12 points . Tablet computer sales [3]broke out of a long slump . Even [4]printers sold in numbers that hadn’t been seen for years.
[5]
[6]
[7]
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 [8]cut its sales forecast for Surface tablets and Windows original equipment manufacturer (OEM) licenses.
A month later, the US had [9]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 [10]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.
[11]
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 [12]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 [13]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.
[14]Silicon foundries surge to new revenue records, but Texas cold snap sent Samsung backwards
[15]Cisco: A price rise is coming to a town near you imminently. Blame chip shortages
[16]AMD promises to spend $1.6bn on 12nm, 14nm chips from GlobalFoundries
[17]Jaguar Land Rover reaches for graph database in search of supply chain knowledge during chip 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:
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 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.
[18]
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:
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 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:
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 or 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 prioritise 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 [19]predicted semiconductor shortages will remain moderate to severe for the rest of 2021 and overall continue until the second quarter of 2022. TSMC has [20]said shortages will continue until 2023.
While plenty of new semiconductor production lines are on the way thanks to big spending by [21]Samsung , [22]TSMC , and [23]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 reserving them for use in higher margin products that provide a better return for the car firm.
As for consumers, Forester’s O’Donnell [24]recommends companies and consumers adopt flexibility around their desired product or brand and potentially be willing to pay the [25]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, recently [26]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 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. ®
Get our [27]Tech Resources
[1] https://www.theregister.com/2021/02/16/uk_2020_laptop_sales/
[2] https://www.theregister.com/2021/03/19/apac_pc_sales_flatlined_idc/
[3] https://www.theregister.com/2020/08/03/worldwide_tablet_shipments_jump_after/
[4] https://www.theregister.com/2021/03/31/asia_pacific_printers/
[5] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=2&c=2YLYFOxbPSiQINRReSbrTngAAAMg&t=ct%3Dns%26unitnum%3D2%26raptor%3Dcondor%26pos%3Dtop%26test%3D0
[6] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YLYFOxbPSiQINRReSbrTngAAAMg&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[7] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YLYFOxbPSiQINRReSbrTngAAAMg&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[8] https://www.theregister.com/2020/02/27/microsoft_cuts_sales_forecasts_coronavirus/
[9] https://www.theregister.com/2020/02/27/microsoft_cuts_sales_forecasts_coronavirus/
[10] https://www.theregister.com/2020/03/21/home_working_register_guide/
[11] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=4&c=44YLYFOxbPSiQINRReSbrTngAAAMg&t=ct%3Dns%26unitnum%3D4%26raptor%3Dfalcon%26pos%3Dmid%26test%3D0
[12] https://www.canalys.com/newsroom/canalys-global-electric-vehicle-sales-2020?ctid=1935-bb4a13a482b9d8d123b6f351d0c1ed49
[13] https://www.theregister.com/2020/09/28/us_throws_new_sanctions_at/
[14] https://www.theregister.com/2021/06/01/q1_2021_foundry_revenue_trendforce/
[15] https://www.theregister.com/2021/05/20/cisco_price_rise/
[16] https://www.theregister.com/2021/05/14/amd_globalfoundries_deal/
[17] https://www.theregister.com/2021/05/10/jaguar_land_rover_tigergraph/
[18] https://pubads.g.doubleclick.net/gampad/jump?co=1&iu=/6978/reg_onprem/personaltech&sz=300x50%7C300x100%7C300x250%7C300x251%7C300x252%7C300x600%7C300x601&tile=3&c=33YLYFOxbPSiQINRReSbrTngAAAMg&t=ct%3Dns%26unitnum%3D3%26raptor%3Deagle%26pos%3Dmid%26test%3D0
[19] https://www.theregister.com/2021/05/12/gartner_shortage/
[20] https://www.theregister.com/2021/04/16/tsmc_chip_forecast/
[21] https://www.theregister.com/2021/05/13/samsung_and_hynix_fabs/
[22] https://www.theregister.com/2021/05/04/tsmc_arizona_fabs/
[23] https://www.theregister.com/2021/05/17/intels_chip/
[24] https://go.forrester.com/blogs/the-global-chip-shortage-wont-ease-soon/?categoryid=2826672?categoryid
[25] https://www.theregister.com/2021/05/20/cisco_price_rise/
[26] https://www.theregister.com/2021/05/28/desktop_renaissance_no_its_just/
[27] https://whitepapers.theregister.com/
They only have themselves to blame
They have always tried to bully silicon vendors (and other suppliers) into very one-sided terms - as shown at the start of the pandemic, where lots of orders were cancelled with the expectation that the capacity that released would be there "on demand" when it was needed.
At the very least, they should be holding wafers of the chips they need as a buffer - sure that leads to some inventory value loading, but is no where near as expensive as storing fully packaged devices and gives some protection against supply fluctuations.
Re: They only have themselves to blame
Car makers are also used to dealing with suppliers who only have one customer - themselves. I used to know somebody who worked for one of these suppliers. When order quantities went up, they employed temp workers and went to multiple shifts. When orders went down, they got rid of the temp workers, and went back to single shifts. I dare say at the start of the pandemic, orders would have dried up completely, and the company would have closed, and furloughed the staff until more orders came in.
I get the feeling that the car manufacturers did the same thing to the chip foundries. They were then horrified to discover that they couldn't just buy more wafer-start slots six months later when things picked up. The foundries had allocated them to their other customers.
Re: They only have themselves to blame
As the article says, the car manufacturers do not bully the silicon vendors: they don’t buy enough parts and they mainly buy older parts that have low production costs and low prices. A contract for a small number of parts with a low production cost and a low price is not something you can use to bully a supplier with.
The bullies are Apple, Samsung and the other big phone makers, who can make or break an investment in manufacturing by the foundries. You’ve tooled up for 500 million parts a year on a new process, and Apple casually mentions that it’s looking to change supplier? You’ll meet their demands, because without their volume you won’t be able to pay back your investment costs.
Your “should have...” scenario is impossible: there’s around $500 of semiconductor chips in a modern car. Multiply by 6 million units (an industry average for a volume car maker) and you’ll run out of money very quickly by just buying your pre-ordered chips into stock without using them to generate sales (for perspective, that $3 billion inventory cost is around twice the price of bringing a completely new car model from drawing-board to first sale). But: the car-makers do not directly purchase semiconductors; they purchase finished control boards, computers, and assemblies from their suppliers, so the inventory cost is double or triple the cost of the chips. That is a recipe for bankruptcy.
Everything needs intelligence these days, except my Harley.
No it doesn't. Very little requires intelligence, or even automation and control. Every part of a vehicle doesn't need to talk to every other part, nor does it need dubious 'AI' to replace the function of the driver. These fripperies are *purely* a function of the marketing department - a way to slightly differentiate your product from a market full of very similar things.
FFS it's not difficult. The car is a mature technology and we managed without all this crap for a hundred years or more... however did we do it?
I'm not complaining about things which are actually useful - engine control, antilock braking, reversing beepers when you can't see the back of the vehicle. But do we really need the processing power of a small data centre just so an idiot can get in the back seat when he's 'driving'? If you don't want to drive, take the train, or a bus, or a bicycle, or even a taxi.
/rant
Re: Everything needs intelligence these days, except my Harley.
Umm, you mentioned Harley - do you really think the new LiveWire would move as much as an inch without computer chips?
Even Harley had to bend to the inevitable.
On the plus side, the LiveWire is IMHO the first Harley that's actually interesting. If you want to see it ride, watch the movie Vanquish :)
Re: Everything needs intelligence these days, except my Harley.
It really, really annoys me too...BUT
The (gold) rush to autonomous cars is and has been providing a lot of driver improvement technologies for the layman. Assisted driving tools, like lane change monitoring, separation distance management, and the general build up of driving monitors saves lives.
I'm firmly and hugely in favour of that.
I can only talk about this form a German viewpoint
Car-makers were in a crisis before. They received tax money and people got incentives for buying new cars.
There were times when Volkswagen didn't know where to put the new cars. They always came up with an excuse for reducing or even halting production. It was never: “We got too many cars, people don't buy them.”, but always something like “A cow farted near a supplier, therefore we have shortages now.”
The bottom line is this: Few of the younger ones want a car. Many don't even bother getting a license. Especially in the cities people do without them. They cost a lot (+in upkeep) and just stand around 95% of the time, taking up more space than is dedicated to humans.
Currently, any excuse is welcome and count on them to jump onto new excuses in the future.
Re: I can only talk about this form a German viewpoint
Weirdly, I'm presently looking at cars - exactly because I don't really trust the airlines yet.
In Germany.
"autos [...] can handle slightly outdated tech"
Haha yes the stereo system in my 2011 model car is worse than Winamp was in the 90s and don't get me started on its GPS.
I'd probably be happier if cars weren't filled with piles of touchscreen crap.