Auto industry to lose a massive $110bn due to global chip shortage

By Sayujya S, Desk Reporter
  • Follow author on
Auto Industry Image
Representational Image

The ongoing semiconductor chip shortage is now expected to cost the global automotive industry $110 billion in revenue in 2021, according to the American consulting firm AlixPartners.

The forecast is up by 81.5 percent from an initial forecast of $60.6 billion, which was released in late January when the parts problem started causing automakers to cut production at plants.

Mark Wakefield, global co-leader of the automotive and industrial practice at AlixPartners, said a number of factors have contributed to the increase, including a fire at a plant near Japan’s Tokyo for chip supplier Renesas and weather-related kinks in the automotive supply chain.

“The pandemic-induced chip crisis has been exacerbated by events that are normally just bumps in the road for the auto industry, such as a fire in a key chip-making fabrication plant, severe weather in Texas and a drought in Taiwan,” he said in a press release. “But all these things are now major issues for the industry which, in turn, has driven home the need to build supply-chain resiliency for the long term.”

Effect on vehicle production

AlixPartners is forecasting that production of 3.9 million vehicles will be lost this year as a result of the shortage. That’s up from January’s forecast that estimated the shortage would cut production of 2.2 million vehicles.

In the US, the shortage has caused the Biden administration to order a 100-day review of US supply chains. About $50 billion of President Joe Biden’s $2 trillion infrastructure proposal also is earmarked for the American semiconductor industry.

American automakers such as Ford Motor and General Motors (GM) expect the chip shortage to cut billions of their earnings this year. Ford said the situation will lower its earnings by about $2.5 billion in 2021. GM expects the chip shortage will cut its earnings by $1.5 billion to $2 billion.

Integral for new-age vehicles

Semiconductor chips are extremely important components of new vehicles for areas like infotainment systems and more basic parts such as power steering and brakes. Depending on the vehicle and its options, experts say a vehicle could have hundreds of semiconductors, if not more. Higher-priced vehicles with advanced safety and infotainment systems have far more than a base model, including different types of chips.

Dan Hearsch Image
Dan Hearsch
MD – Automotive & Industrial Practice

“There are up to 1,400 chips in a typical vehicle today, and that number is only going to increases as the industry continues its march toward electric vehicles, ever-more connected vehicles and, eventually, autonomous vehicles. So, this really is a critical issue for the industry. But we expect that by Q3, there’s enough to get everybody back up and running for the most part. And then in Q4, we should get humming again and then next year get back to normal, hopefully.”

That doesn’t mean supply constraints will be completely solved next year, but Mr. Hearsch said automakers should have enough semiconductors to produce as many vehicles as they want.

The origin of the shortage dates to early last year when COVID-19 caused rolling shutdowns of vehicle assembly plants. As the facilities closed, the chip suppliers diverted the parts to other sectors such as consumer electronics, which weren’t expected to be as hurt by stay-at-home orders.

Mr. Hearsch said the top priority for companies right now is “mitigating the best they can the short-term effects of this disruption,” which may include everything from renegotiating contracts to managing the expectations of lenders and investors.

Related: S.Korea aims to be global leader in chip making; Reveals plan worth $450bn