Semiconductors such as memory chips or processors are the foundation for modern technology, from vehicles and smartphones to washing machines and TVs. They are the base material for the microchip, essential for manufacturing almost every electronic device that we use today.
For electric vehicles especially, the chips are at the center of the industry and they determine how well the entire electric system will perform. Some of the biggest trends in the newest vehicles are possible with the help of semiconductors: GPS tracking, sensors for safety and assistance functions. And according to Deloitte, electronics will account for half of the cost of a new vehicle by 2030. The cost of Semiconductors is projected to reach $600 (£436) per vehicle by that point, almost double the 2013 price of $312.
But just as more and more cars and trucks went digital, the industry had been hit with a shortage of semiconductors.
But why did it happen and how did the shortage affect the auto productions?
What’s Behind the Global Component Shortage?
The component Industry has more than doubled in value over the last two decades.
The chip market’s continued growth and incredible demand has put a massive strain on the industry’s ability to cater to all. In 2021 the Semiconductor Industry Association (SIA) endorsed the World Semiconductor Trade Statistics (WSTS) global semiconductor sales forecast, which projected the industry’s worldwide sales to be $553.0 billion in 2021, a 25.6% increase from the 2020 sales total of $440.4 billion. WSTS projects year-to-year increases in Asia Pacific (26.7%), Europe (25.6%), the Americas (24.6%), and Japan (19.5%). The global market is anticipated to post moderate growth of 8.8% in 2022, to reach $601.5 billion in annual sales.
The global chip shortage began with the breakout of the Covid-19 pandemic
In 2020, the auto industry saw a considerable drop in demand. On the other hand, the demand for personal electronics drastically increased once remote work and home-schooling became the norm. Laptops and servers were needed more than ever and sales rose in a way that was not anticipated, resulting in a market that was not ready to face this new development. This created a situation where, while the auto industry drastically cut chip orders, other sectors were met with an increased need. And in the second half of 2020, when the auto sector’s demand rebounded sharply in spite of the predictions for the year, the semiconductor industry was already focusing on meeting the demand for electronics for other applications.
More than this, Covid-19 brought to light another critical issue, this time relating to the global supply chain. There are only two companies responsible for most of the global chip manufacturing, Taiwan’s TSMC and South Korea’s Samsung. These two are the dominant players in producing leading-edge chips used in mobile devices or for military applications.
Taiwan suffering its worst drought in more than 50 years
In 2020, Taiwan was hit with one of its worst droughts in more than 50 years. As a result, many of its reservoirs were at less than 20% capacity, and in the most extreme cases, the water level fell below 10%.In one of the primary sources for Taiwan’s $100 billion semiconductor industry, the drought caused the water level to be at one of the lowest levels it had ever been – only 7% full. While the industry was heavily relying on the chips manufactured in Taiwan, TSMC was struggling to get the needed quantities of water.
The rise of 5G and overlapping chip demand
According to some experts, the switch from 4G to 5G is believed to have also contributed to the global chip shortage. The rise in 5G has also increased the demand for semiconductors. An expensive 5G rollout requires quite a large amount of chips which need to be manufactured at the same size as those used for automobiles. For the auto industry, the high amount of overlap between chips used in 5G and those used for vehicles became another factor on a growing list that contributed to the crisis.
Geopolitical Power Dynamics
The rivalry between the United States and China has also had a say in the crisis, with neither of the states being independent enough to have a supply chain of their own. As a result, companies from third countries were drawn into this geopolitical competition of sorts, further worsening the shortage.
The war in Ukraine has also negatively impacted the global supply of neon gas, which is used to make semiconductors.
The Chip Shortage and Its Effects on the Telematics Industry and Fleet Managers
The motor vehicle industry appears to be most affected by the chip shortage. According to market intelligence group LMC Automotive, around 10 million fewer vehicles were produced in 2021 as a result of supply chain issues. The component shortage affecting the automotive sector has affected the development of telematics technologies. Making it tough for fleet customers to use telematics solutions to acquire telematics hardware, tablets, new vehicles, and more. Data from some of the world’s largest component makers indicate an increase in lead times from 10 weeks to 17 weeks, according to Bloomberg.
How it impacts fleet managers
With the rise in vehicle costs as a result of the component shortage, fleet managers are paying up to 18% to 20% more than they are accustomed to.
Low or no stock
Fleet managers can expect dealerships to have very little excess inventory, and it is anticipated they will run out of stock towards the end of the year.
Reduced incentives and product availability
When manufacturers sell all the merchandise they have produced, there is little scope left to offer fleet incentives. Plus, there could be big changes to both rebate programs and fleet availability in 2022.
The high demand for fitting materials such as steel and plywood is pushing prices up around the world, affecting more than just the global supply chain of chips.
Responses to the Crisis and Predictions for the Future\
The responses to the shortage have been varied, with most car manufacturers adapting to the new situation as best as they could. For example, there is General Motors which has decided to temporarily suspend the seat heat on a portion of its vehicles, while promising to retrofit this feature when the required chips will be available. On the other hand there is Mercedes, which had to pause the production of its GLC, while Mazda had to cut its production up to 7.000 cars in the first quarter of 2021.
But there is one auto manufacturer that managed to adapt to the chip shortage in record terms. Tesla registered an 87% increase in its 2021 deliveries, compared to those from 2020. But that was only possible as they build the vehicles from scratch, unlike the other automotive companies. More than this, Tesla has also been able to quickly rewrite some of its software and integrated alternative chips.
And while it is difficult to accurately predict the end of the crisis, as any new development could significantly impact the situation, most experts believe that the chip shortage will not see an improvement before 2023. However, there is a real possibility that the crisis will slowly improve as companies had time to adapt and had become much better in managing the supply chain.
And despite these severe shortages, the good news is the rising availability of new connected car technologies and platforms. In short, fleet managers have a variety of options for accessing and managing fleet data in light of the current shortage of telematics devices.
CANGO Mobility has supported fleet owners globally for over two decades of evolution in the telematics industry. And the component challenges the ongoing pandemic has created is another wave that our innovation and partnerships will help us see out.
One way we’re doing this is through the latest edition to our product lineup, CANLibrary. The solution combines both hardware (the existing client’s hardware) and software; a hardware-agnostic component that acts as the physical base of the solution, with a software platform-independent middleware layered on top of it.
Remain competitive on the market and navigate this challenging period with CANGO Mobility’s solution!