The semiconductor shortage from 2020 to 2023 disrupted up to 169 industries—and with how digitized everything is nowadays, one could say it disrupted pretty much the whole world as well.
The automotive industry was no different. After all, it’s a major client of chip conductors, with the industry accounting for 11.4% of semiconductor demand.
Not only did the shortage derail production processes and slow down supply chains, but it also pushed manufacturers to reimagine their business strategies.
And while experts say that the industry has mostly recovered from the shortage, one could still feel its ripples.
Here’s an overview of the lingering effects of this recent, industry-changing shortage.
Origins of the crisis
To start, let’s take a look at why there was a semiconductor shortage in the first place. In total, there were 4 main factors:
Covid-19
Given that it occurred from 2020-2023—the years when COVID-19 was ravaging the world—one could rightly deduce it as the shortage’s driving force.
And it was. The workforce was slashed due to quarantine regulations, and demands for laptops skyrocketed with the rise of work-from-home set-ups.
However, the pandemic wasn’t the only reason.
Natural Disasters
Natural disasters also damaged prominent plants and factories. A winter storm in Texas and the largest drought of the last half-century in Taiwan (the globe’s largest semiconductor manufacturer) led to months and months of production setbacks.
Geopolitical Conflicts
Geopolitical conflicts were a key factor as well.
With the US and China having trade wars in 2021, the former imposed restrictions on the latter’s chip manufacturers.
The Ukraine-Russia war was also crippling since Ukraine is the leading manufacturer of neon, a gas needed in chip creation.
Cryptocurrency Boom
Lastly, the cryptocurrency boom of 2021 led to an exponential increase in demand for graphics cards, which were used in crypto mining.
Note, however, that even before the pandemic and these other factors—and all throughout its history—there have always been prominent production and supply chain problems. After all, making chips is one of the most R&D-intensive processes across all industries.
All this formed a “perfect storm” that greatly exacerbated pre-existing problems and led to both higher demand and less supply for semiconductors, creating a severe shortage.
Less production and higher prices
The shortage’s immediate effect on vehicle production was staggering.
In 2021, the auto industry as a whole produced 7.7 million fewer vehicles than they planned. This led to an estimate of a whopping $210 billion dollars lost in projected revenue.
While 2022 and 2023 were a bit kinder, there was still a significant loss of around 5 million fewer vehicles being produced.
Brand-specific examples of production disruption include:
- Ford halting production of its signature F-150 trucks at multiple facilities;
- General Motors being forced to build vehicles without certain features;
- Toyota reducing production targets by 40%;
- Volkswagen plants only operating at 50% capacity.
Additionally, many car models now had fewer configurations available as manufacturers had to streamline production.
Because of this, prices of new cars went up. With dealers having dramatically less in their inventories, they had to increase prices and even slash traditional incentives and discounts.
From 2021 to 2022, there was around a 12% increase in brand-new car prices.
Even higher prices for used cars
But the price hike of new cars was nothing to that of used cars. With fewer new cars available, buyers looked to secondhand sellers.
The car industry has always had a prominent secondhand market, but this time, used cars rose by up to 45% in price from 2021 to 2022. The car industry then became a “seller’s market.”
This also led to more demand for older models as there were fewer newer models—or fewer variations of newer models.
However, this created a bubble that has since burst. And now, in 2024, the prices of used cars continue to go down.
Strategic adaptations by automakers
The car industry has always been known to be particularly resilient. It also shows how manufacturers have adapted to the shortage.
With no choice but to adapt, brands have adopted both short-term coping strategies and long-term structural changes:
Short-term Strategies
1. Feature optimization
Priorities shifted, and semiconductors were allocated primarily to particularly profitable models and critical features.
2. Build-shy strategies
Vehicles were assembled but not finished. Components that required semiconductors were not included, and the whole car was planned for later completion.
3. Design modifications
Models were tweaked to reduce chip usage. For example, more focus was placed on software development to reduce the dependency on hardware.
4. Scheduling adaptation
Strict scheduling just was not possible and gave way to more flexible practices.
Long-term Strategic Shifts
1. Solidifying relationships with semiconductor makers
To get more immediate access to semiconductors, brands either formed more direct relationships with semiconductor makers or even planned to make their own semiconductors.
For example, General Motors has signed a long-term contract with chip maker Global Foundries.
2. Plans to make their own semiconductors
Other brands, like Hyundai, Volkswagen, and Tesla, have all been reported to be developing or planning to develop their propriety chips. This reduces their dependency on external suppliers while also allowing them to develop car-specific chips.
3. Supply chain adjustments
To be more prepared for another shortage, manufacturers have begun stockpiling critical chip components. They’ve also established more robust supplier networks as to not be too dependent on only a few suppliers.
Conclusion: What’s in the future?
While the chip demand in the phone and PC industries has been decreasing, the automotive industry’s demand for semiconductors is actually on the rise.
This isn’t a surprise.
Our world won’t stop getting more and more digitized. (ChatGPT is the talk of the town. My toddler recently wanted to play video games on the car’s infotainment system, and my grandmother asked me what is a VPN).
Cars are not exempt. Electronic and self-driving vehicles already seem to be the future of the industry. The technologies involved in both require even greater computing power—and thus even more chips.
So, while the shortage dealt a massive blow to the industry, it might prove to be what we need to push the industry forward.
