The semiconductor shortage impacting the automotive industry has left companies and countries scrambling for solutions. Chipmakers are working to increase manufacturing capacity, but building new manufacturing plants requires multibillion-dollar investments and at least 18 months to launch. Automakers and parts suppliers are looking to balance just-in-time manufacturing systems with holding more inventory of chips and the crucial parts and components that use them.
Increasing capacity and managing inventories help address the present shortages. However, neither remedy solves the longer-term challenge of navigating cyclical semiconductor demand, supply constraints and the associated risks and uncertainty from the chip manufacturers' geographic concentration, geopolitical tensions, natural disasters and extreme weather events.
Federal and state governments' involvement in addressing the chip shortage demonstrates the critical importance of the U.S. automotive industry.
Governments in other countries are responding similarly to the semiconductor shortage their automakers face. Public investments and incentives aimed at expanding domestic semiconductor capacity will mitigate risks of dependency on geographies. But the complexity and interdependency of the global semiconductor supply chain also warrant a cautious approach to trade policies. Robust semiconductor and automotive industry engagement can help avoid unintended consequences of these policies.
The current supply crunch, as well as the longer-term impact, will require a more systemic solution. However, any constructive approach must involve a diverse array of companies at all stages of production with intricate global interdependencies in two of the world's largest supply chains — and that is no easy task.
Growing chip demand will only exacerbate this issue. As automotive technology evolves, the industry will become more semiconductor-intensive.
Advanced safety features, electric vehicles, powertrain controls, automated driving, telematics and infotainment all drive rapidly increasing auto chip demand. As a result, some forecasts show automotive semiconductor revenue will nearly double over the next five to six years.
Many semiconductor companies have expanded their products to support the auto industry's growth projections for chip demand.
However, nonauto sectors, such as computing and wireless communications, compete for the same supply. At roughly 10 percent of all chip sales, auto demand is relatively small compared with these industries. Larger customers will have priority when fabrication capacity inevitably tightens again.