In the past couple of weeks, several of the world’s leading carmakers have announced a variety of “anti-crisis” measures. For example, Toyota will cut production by 40% in September and release 40,000 cars less for the European market. Ford closed its plant in Cologne for a week, and production of the F150 pickup in the United States stopped for the same period. Audi is extending holidays for its German factories, as is Volkswagen at its Wolfsburg plant.
In the UK, in July, the production of cars collapsed to the level last observed back in 1956, 53 thousand units. Note that last year the epidemic did not lead to such failures. Moreover, in comparison with the same period of the previous year, the decrease in July 2021 was 37%.
All this happens during a period of not a deep recession, but, on the contrary, a rapid recovery of the world economy, when the demand pumped up by central bank money not only returned to the pre-crisis level, but also surpassed it due to the purchases delayed last year. Everyone wants to buy a car, the problem now is to release and sell it. Semiconductor shortages remain at the root of all problems.
Asia in the center
The problem continues to worsen. In August, there was a new outbreak of the coronavirus pandemic, this time in Malaysia. The East Asian state is not a leading chip manufacturer like Japan, South Korea or Taiwan, but has become one of the key sites for semiconductor testing and packaging in recent years (not least due to its geographic location). The government of the country is doing everything it can. Businesses are now allowed to use about 60% of the workforce at the same time. The figure can be increased to a maximum provided that 80% of workers are vaccinated. But so far, only 57% of Malaysians have received at least one dose of the vaccine, and it is not possible to do without interruptions: some enterprises have been suspended for several weeks due to sanitization, especially companies like STMicro or Infineon, which supply chips to the automotive industry. …
In general, the period between ordering and receiving goods for industrial consumers of microchips in July reached 20 weeks (we are talking about all industries). Compared to the previous month, it grew by another eight days, although in June it was already a record high by a large margin. Most companies in the industry predict it will remain at the highest levels for at least the end of this quarter.
The epidemic in Malaysia is likely to be curbed in the near future – the number of cases has been steadily falling in recent days. But the common problem associated with the shortage of chips cannot be solved so quickly. Although TSMC, Samsung and other market players constantly assure that they are doing everything to saturate demand, it will not be so easy to fulfill such promises. Expanding production in highly complex factories requires several years – the very case when even nine women cannot give birth to one child in a month.
Automakers generally suffer more than other semiconductor consumers. What is the reason for this? First, computer manufacturers generally enjoy a privileged position with chip suppliers. These are the larger customers whose orders should be fulfilled first, as they bring in more money. During the pandemic, they fairly correctly predicted the growth in demand for computers, routers, smartphones, game consoles, etc., redirecting the main capacity to work in these industries. On the contrary, no one could have guessed that the automotive industry will recover very quickly from lockdowns. Moreover, even before the start of the epidemic, it seemed that the car market was rather weak and an explosive growth in demand was not expected. That is why now even the leading auto giants are facing problems when purchasing semiconductors.
The situation is not improved by the fact that automakers have been trying to protect themselves for almost a year now, stocking up on chips ahead of time. A classic problem in the face of scarcity, which only exacerbates the latter. Car factories are trying to focus on top-selling models and high-value-added vehicles in order to somehow recoup their additional costs. According to forecasts made back in the spring (that is, before the situation got worse), manufacturers will not be able to produce about 4 million planned cars this year, and losses in revenue will amount to about $ 100 billion.
But in any case, car prices continue to rise around the world. For example, in the United States at the end of July, the average price of a car was $ 41 thousand, which is $ 6 thousand, or 17%, more than in July 2020. Used cars rose even more – by 21%. There is no reason to believe that this “auto-inflation” will be curbed before the end of the year. Even if the shortage of chips is suddenly overcome, the deferred demand will hang over the market for some time.
The shortage of semiconductors is hitting the electric vehicle industry as well. The demand for cars with an electric motor is more elastic due to their high cost, and they consume even more chips in production. Moreover, the industry of building and maintaining infrastructure for electric vehicles may also face difficulties. Apparently, Joe Biden’s plans to transfer 50% of all cars in the United States to electric traction by the end of this decade are hardly realized.
Who else has a hard time
Of course, the list of industries affected by the shortage of microchips is not limited to the automotive industry. For example, quite recently in Russia there was a danger of interruptions in the supply of bank cards, where the terms of shipment of the corresponding components also increased. The serial production of some gadgets, including the latest smartphones, will also be delayed. In total, according to Goldman Sachs estimates, the problem somehow affected 169 sectors of the economy, including unexpectedly even such sectors as the production of metal containers, pumps, the chemical industry and wholesale trade.
When will all this end? We are no longer talking about the current year. STMicro CEO Jean-Marc Cherie predicts that the crisis will not be resolved until early 2023. According to the head of Intel Patrick Gelsinger, the problem could last for another two years. Perhaps the “help” will come not from the supply side, but from the demand side: the rapid rise in prices will force consumers to abandon purchases and reduce the overall effective demand, after which semiconductor manufacturers will gradually regain control over the market situation. One way or another, but the deficit of a key component for a good half of the industries in the foreseeable future will continue to put pressure on global inflation, with all the ensuing problems for the world economy as a whole.