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Sunday, March 07, 2021

Explained: Why a global chipset shortage is choking top carmakers

At the moment, all top carmakers from Toyota to Volkswagen, Daimler and GM are reeling from this global shortage of semiconductors.

Written by Anuj Bhatia , Edited by Explained Desk | New Delhi |
Updated: February 15, 2021 9:18:45 pm
Newly manufactured Honda Civic automobiles sit on a car transporter at the Honda Motor Co. auto plant in Swindon, UK. (File Photo: Bloomberg)

A global chipset shortage has created panic among the world’s leading automakers, so much so that the companies have been forced to either halt or slow vehicle production.

At the moment, all top carmakers from Toyota to Volkswagen, Daimler and GM are reeling from this global shortage of semiconductors. Ford is cutting production of its highly profitable F-150 pickup trucks, whereas General Motors said it plans to temporarily shut work at three plants in North America as chip shortages halt production lines. If the ongoing global semiconductor shortage will continue for a few more months, it will hit the carmakers who are already under pressure from regulators to pump more resources into electric vehicles.

Why are automakers hit?

Like a smartphone, a modern car also uses semiconductors. In fact, a Deloitte analysis suggests that electronics make for 40 per cent of a new car’s total cost. Over the past few years, automakers have increasingly become dependent on semiconductors and electronic components. More cars now have a power steering, tablet-like display, Wi-Fi connectivity and cellular connectivity. That means to make a car you need semiconductors and without access to the chips, it is impossible to manufacture a vehicle. A delay in getting the chips will halt production lines and automakers can’t keep up with a boom in demand. That’s exactly what’s happening now.

Why is there a global semiconductor shortage?

Silicon chips are the backbone of the consumer electronics industry, but they are in short supply. Demand for these sophisticated chips have soared during the pandemic, as homebound consumers lapped up laptops, next-gen game consoles like the PlayStation 5 and Xbox Series X, smartphones and TVs. When the Covid-19 was its peak, carmakers slashed orders for the chip due to lower than expected sales. At the same time, chipmakers started diverting attention to meet the growing demand for chips used in the consumer technology space.

Automakers began warning of a semiconductor shortage sometime late last year after demand for vehicles picked up in many parts of the world following a shutdown of production plants due to the pandemic. However, the production has not been able to shift back to the requirements of the auto segment as quickly.

Experts, however, blame automakers and their lack of farsightedness and poor planning for the current situation. Global carmakers have been badly affected by the aftermaths of the Covid-19 pandemics, but this continuing critical shortage of semiconductors could potentially derail the chances of them recovering as fast as many had initially hoped for.

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