Autos and semiconductors are at the heart of the global supply chain crisis. Here is what experts say is next for the pivotal sectors.

August 29, 2021

Autos and semiconductors are at the heart of the global supply chain crisis. Here is what experts say is next for the pivotal sectors.

Companies are beginning to adapt to the global shortfall in chips amid a supply chain crisis.
But short-term measures are unlikely to stem the bleeding, experts say.
In the long run, companies will have to adapt and are already doing so in promising ways.
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It might be the biggest single problem facing markets right now. The global chip shortage is still going on, and it's slamming sectors from gaming to dog-washing.

To some extent, this is old news. Months ago, massive demand for chips amid widespread work-from-home began colliding with supply constraints, sending the cost of wafers soaring.

What's new is that companies are starting to face a new reality. It has grown clear that the chip shortage will be with us for years - and that there is no gimmick for getting around it.

Companies are beginning to shift around production to mitigate the shortfall. Some are pushing chip-light products over chip-heavy ones, or are trying to redesign products to reduce wafer demand.

"But overall, none of these moves are enough to completely avoid the impact that's affecting everyone and will continue to affect everyone," said Richard Barnett, CMO of Supplyframe, an electronics industry analyst outfit.

Barnett told Insider that impacted firms are stuck with a thin playbook for navigating the chip shortage. Short-term maneuvers only buy so much running room, and long-term investments can require months or years to take effect.

Supplyframe sees the chip shortage lasting well into 2023. But unlike a conventional shortage, Barnett thinks this one will come in waves.

That is due to three factors: demand, product cycles, and prioritization. The pandemic-driven spike in consumer demand for chip-dependent products is rippling through the industry, creating uncertainty around just how much appetite is really out there. Additionally, the regular ups and downs of the product cycle - Apple rolling out a new iPhone model, for example - adds to the wave dynamic.

Lastly, semiconductor manufacturers like TSMC and Intel are being forced to prioritize who should get chips first amid limited supply. These chip-makers naturally want to prioritize the most lucrative customers, like Apple and Samsung. But cutting off other companies from chips could permanently alienate them as customers, crushing future business, Barnett said.

But there is a bright side: necessity is breeding invention, especially in the chip-starved auto sector. Companies like Ford are trying to find opportunities in developing a built-to-order business model, one that might be more resilient to external crunches.

Toyota, likewise, is re-evaluating the merits of its "just in time" business, which tries to maximize efficiency by having all parts delivered only when they are needed and not a moment sooner.

"Toyota is the best-known company for the just-in-time model," said Soo-Haeng Cho, professor of operations management and strategy at Carnegie Mellon University. "Just-in-time is more doable when [companies] have local suppliers."

Toyota traditionally relied heavily on local Japanese suppliers, but as supply shifted to Chinese firms, the company became "more exposed to these kinds of disruptions," Cho added.

The government is becoming more alert to the chip-shortage challenge, too, realizing that its involvement is paramount to making the economy run smoothly. In June, the Biden administration released a report flagging four key industries essential to the American economy, including the semiconductors industry.

"The private sector has an incentive to reduce costs, but no incentive to invest more to prepare for all these disruptions. Therefore, the government wants to incentivize the private sector to invest more [while] providing tech subsidies to revitalize supply chains," said Cho.

For chip-makers, boom times are still to come even after the chip shortage abates, said Barnett.

"The overall long-term projections for electronic demand is just very, very strong," he said. "COVID just intensified the issue and brought in dynamics that would have played out over three years into six months."

Read the original article on Business Insider