Now, chip shortage threatens industry

Like canaries in a coal mine, carmakers and suppliers in China are warning that a shortage of automotive microchips is threatening to slow down the global industry's pandemic recovery.

The alarm was sounded this month by Volkswagen and German suppliers Bosch and Continental, which cited tightening supplies of semiconductors and said bottlenecks could run into 2021.

The industry is beginning to brace for impact as microchip prices rise and inventories dwindle.

Li Shaohua, deputy secretary-general of the China Association of Automobile Manufacturers, said last week that auto production in China could take a "relatively big" hit in the first quarter of 2021 as a result.

Some automotive companies around the world are still recuperating from the hit they took when China's market crashed because of COVID-19 in the first quarter of 2020.

Still unknown is how bad the chip situation will be or whether the shortage might spread to other markets.

Automakers in China were the first to feel the pinch partly because the world's biggest auto market is recovering so rapidly from the pandemic — chipmakers simply can't keep up with its rebound. But as North America and Europe bounce back, they may also come under pressure.

"To be honest, everyone's at risk. It could be global," said one executive at a Western automotive player in Asia who didn't want to be named. "It's more than a minor headache, and it can't be fixed quickly."

It takes only one missing part, no matter how mundane, to halt production of a vehicle anywhere in the world. The internationally intertwined auto industry learned that the hard way following the 2011 earthquake-tsunami-nuclear meltdown disaster in Japan. Auto output from North America to Nagoya was hammered when a single microcontroller plant in Japan owned by Renesas was knocked offline.

But this time, the bottleneck is more a matter of chipmakers not being able to ramp up quickly enough to keep auto plants humming. As the industry pulled away from the pandemic in mid-2020, chipmakers prepared for a more moderate recovery, according to observers in China. Now, with demand jumping ahead of forecasts, chipmakers are finding it tough to dial up production to keep pace.

China's new-vehicle output started to recover from the pandemic in April and continued to grow for the seventh-straight month in October, advancing 11 percent to exceed 2.55 million vehicles. In the first 10 months of the year, total production was down just 4.6 percent.

In the first 20 days of November, new-vehicle production in China climbed 9.6 percent to top 1.6 million, according to the manufacturers association. Output of new light vehicles, including sedans, crossovers, SUVs, multipurpose vehicles and minibuses, rose 7.2 percent to nearly 1.4 million in that period.

As suppliers and automakers scramble to secure microchips to feed the growing vehicle output, automakers could be forced to prioritize production of certain vehicles or trim lines at the expense of others.

Volkswagen was among those warning the lag could disrupt output.

"The chip supply for certain automotive electronic components has been affected due to uncertainties caused by the pandemic," VW said in a statement. "This has led to a potential interruption in automotive production, with the situation getting more critical as demand has risen due to the full-speed recovery of the Chinese market."

Global parts-making powerhouses Bosch and Continental echoed the alert.

"Although semiconductor manufacturers have already responded to the unexpected demand with capacity expansions, the required additional volumes will only be available in six to nine months due to the usual lead times in the semiconductor industry," Continental said in a statement. "Therefore, the potential delivery bottlenecks may last into 2021."

Other automakers said they were aware of tightening supplies and were working with suppliers to stave off any interruptions, even if production had not yet been impacted.

"We are aware of the increased demand for semiconductor microchips as the auto industry continues its global recovery," General Motors said. "Our supply chain organization is working closely with the supply base to ensure adequate supply and mitigate any potential impacts."

Nissan, Daimler, Toyota, Ford and Hyundai likewise said they were working to keep production stable.

"We understand all auto OEMs are currently facing the same issue of potential supply disruptions of select chips for automotive manufacturing," Hyundai said in a statement.

More than a third of automakers and suppliers in China are seeing tight supply of microchips, according to a survey published last week by Gasgoo, an information consultancy in Shanghai covering automotive supply chains and procurement in China. Among the survey's 1,600-plus respondents, 6 percent said chip supplies were disrupted, 6 percent said suppliers were demanding higher prices and 36 percent said they were facing difficulty in replenishing inventories.

Respondents blamed the shortage on the suspension or interruption of microchip production at overseas plants during the pandemic. According to research reports of two Chinese securities firms, Wanlian and Great Wall, China's auto industry imports 90 percent of its microchips.

Another factor is that newer vehicles use more chips than older models. Other Gasgoo respondents said the shortage was being caused by the huge growth in demand for automotive microchips as vehicles become increasingly electrified, digital and connected.

Li, of the China Association of Automobile Manufacturers, said the chipmaking industry has been slow to invest in capacity expansion. Coming out of the pandemic, it was especially conservative and is now behind the curve.

Meanwhile, chipmakers in Europe and Southeast Asia, hit by a second wave of COVID-19 outbreaks, have had to scale back output or suspend operations, Li added.

"The imbalance between supply and demand of automotive chips is not new, nor is it only reflected in the Chinese auto industry," Li said in an interview published last week in AutoReview, the official publication of the manufacturers association. He said the association expects production in the country to be affected in the first quarter of 2021 but to mostly recover for the full year.

The key wild card is the COVID-19 pandemic still raging in many parts of the world. A flare-up and new rounds of lockdowns, for instance, could take the edge off global demand and ease pressure on tight supplies. Conversely, resilient auto sales could force a further squeeze.

While light-vehicle sales in the U.S. slid 18 percent through September, sales were down just 12 percent in China. But for October, China's new-vehicle demand nonetheless rose for a seventh-straight month. Light-vehicle sales rose 9.3 percent, narrowing the year-to-date decline to 9.9 percent.