If you’ve driven by a car lot recently, you have probably noticed that inventory looks a bit sparse. Inventory of new cars in the U.S. is 30% of pre-pandemic levels.1 And as a result of low inventory, new and used car sales have seen a spike in prices. This is due to a global semiconductor chip shortage, and it is affecting everything from car manufacturers to electronics.
Semiconductors are a key component to electronic devices, including smartphones, TVs, computers, video games, medical equipment, and cars. When the COVID-19 pandemic first hit, lockdowns slashed car sales and automakers hit the brakes on ordering parts – including semiconductors. At the same time, electronics companies saw a surge in demand – people were working from home and ordering computers, video game consoles, smartphones, and other household devices. When car sales finally rebounded in late 2020 and automakers started increasing orders, there simply weren’t enough chips to go around.
COVID-19 lockdowns slowed the production of semiconductor chips. The shortage has further been exacerbated by various other setbacks for semiconductor factories – a drought in Taiwan disrupted water-intensive chip production; a fire at a factory in Japan; and a winter storm in Texas that shut down factories. And now several Asian factories are being impacted by a recent surge in Delta variant cases.1 Most chips are made in Taiwan, South Korea, and China. According to the Semiconductor Industry Association, only 12% of chips are made in the U.S., down from 37% in 1990. Though the demand is there for the product, increasing chip production will take time as it’s a complex manufacturing process. From start to finish, production can take up to 26 weeks.2 Issues with the global supply chain are further complicating matters due to increased costs to move shipping containers, air freight fees, and a shortage of truck drivers.3
While the car industry only represents 10% of the semiconductor demand, this industry has taken a big hit from the shortage and has had to halt production lines globally. According to Kelley Blue Book, new vehicle prices hit an all-time high for August 2021. The average cost for a new car ($43,355) is up almost 10% from this time last year. Limited inventory and high prices have slowed car sales; and total sales for July were just over 1 million, one of the lowest months in a decade and the lowest volume since April 2020.4 According to consulting firm AlixPartners, the shortage is estimated to cost the global auto industry $210 billion in revenue in 2021.5
In an effort to address the supply issues, The Commerce Department and White House held a summit in September with semiconductor manufacturers and buyers. One big issue they face is understanding the true supply and demand. Manufacturers are placing orders in excess of what is needed for fear that suppliers won’t fill the entire order. This makes it hard for factories to know the true supply need and make plans for new production lines. Earlier this year, the Senate approved the U.S. Innovation and Competition Act (USICA), which would provide $52 billion to fund semiconductor research, design, and manufacturing. It has not yet been voted on in the House.
Chip factories are working towards increasing production. According to the Semiconductor Industry Association, factories have increased their production capacity by 8% since early 2020 and plan to boost it by over 16% by the end of 2022. Global spending on manufacturing equipment is expected to grow by more than 30% this year to $85 billion. Taiwan’s TSMC, the world’s largest contract semiconductor maker by sales, said it is increasing the output of components by 60% this year compared with 2020. Intel, the U.S.’s largest chip maker, will break ground on two new factories in Arizona. They also recently announced a $95 billion investment in Europe for new chip-making factories. Despite this progress, Pat Gelsinger, the chief executive of Intel, says he expects shortages to last into 2022 and possibly into 2023. Others say it could last through the end of 2023. 6
By: Jennifer Baham
1 Daniel Yergin and Matteo Fini. For Auto Makers, the Chip Famine Will Persist. Wall Street Journal. September 22, 2021.
2 Howells, Richard. How Semiconductor Shortages Have Taken a Chip Out of the Global Supply Chain. Forbes. July 13, 2021.
3 Baraniuk, Chris. Why is there a chip shortage? BBC. August 27, 2021.
4 New-Vehicle Prices Surge to Record Highs for Firth Straight Month, According to Kelley Blue Book. Kelley Blue Book. September 14, 2021.
5 Wayland, Michael. Chip shortage expected to cost auto industry $210 billion in revenue in 2021. CNBC. September 23, 2021.
6 Whalen, Jeanne. Semiconductor shortage that has hobbled manufacturing worldwide is getting worse. The Washington Post. September 23, 2021.