The digitalization and electrification of the automotive industry on a global scale is still ongoing. But because of the shortage of lithium batteries and automotive chips, it has been stranded for the past two years. When will the lack of materials be resolved? It doesn’t appear to be a simple process so far, mostly since the supply is far behind the rise in demand. Before the substantially enlarged manufacturing facilities are put into action, the regional supply chain development may encounter various challenges.
anticipation regarding unavailable parts
We must first examine the supply structure in order to properly comprehend the dynamics of the automotive chip supply. Let’s start by examining the chip manufacturers for well-known automakers:
First, integrated device manufacturers (IDMs), such as Infineon, NXP, TI, Renesas, STMicroelectronics, and others, control 80% of the market. These IDMs have long-standing relationships with well-known automakers. As a result, when the scarcity appeared in 2021, the auto brands competed over IDM’s production capacity first. By the end of 2021, several of them were firmly constrained by contracts.
For urgent orders, Second IDMs do require the assistance of contract chipmakers. When IDM’s production capacity is insufficient, assistance from contract chip producers including TSMC, Vanguard International Semiconductor (VIS), and UMC will be requested. The capacity of each contractor, which is obviously limited given that the majority of their clients are in the consumer electronics industry, is nevertheless a determining factor.
Consumer and automotive chips have been competing for production capacity since 2021. For the first few quarters, the war was ferocious, but subsequent changes in the general economy have led to a noticeable fall in consumer demand. The capacity was seized by automotive chips as a result of the uptime weakening. However, important applications like insulated-gate bipolar transistors (IGBT) and microcontrollers (MCU) are still trailing.
Furthermore, the demand for automotive chips cannot be met despite the gradual addition of new production capacity. New production capacity has been made available, including from firms like Texas Instruments (TI) and tier-1 European supplier Bosch, but it might not immediately alleviate the shortage. The other originates in the Chinese supply network. Due to China’s long-standing policy of semiconductor self-production, the area is very self-sufficient. However, China’s brands will receive the majority of this new capacity.
Not to mention, it is worthwhile to anticipate the potential new supply in the future. This includes UMC opening additional production lines in Singapore and Japan as well as TSMC building factories in the US and Japan. GlobalFoundries (GF) has also increased its output in Singapore and Europe. In the market for electric vehicles, Intel and Samsung Electronics have also been prominent players. Samsung has partnered with Tesla to meet Tesla’s chip needs.
According to the auto industry, demand will decline in 4Q22.
It’s important to note that not all automotive chips are in short supply. Examples include display driver integrated circuits (DDI), audio integrated circuits (IC), power management integrated circuits (PMIC), and diodes, all of which may experience a decrease in demand in the latter two quarters of 2022. Additionally, PCB components like copper-clad laminate (CCL) will be regarded as goods in the extensive supply chain.
The supply chain is speeding up its deployments in the automobile industry as the consumer electronics market declines. However, the short supply chains’ supplies have not significantly improved, which implies that automobile assembly is still hampered. It is rumored that the automotive industry’s shipment momentum is waning, likely as a result of the automakers’ recent tilt toward conservatism.
The profusion of black swans in the first three quarters makes it doubtful that the production and sales targets established by automakers will be met by the end of the year. Car manufacturers are now more eager to be able to generate satisfactory annual financial reports. The most popular tactics are layoffs and cost-controlling inventories.
The supply gap between the long and short supply chains has been too great for the auto industry to manage. The belief that there would not be chip shortages at the beginning of the year proved to be unduly optimistic, with the short supply chain playing a crucial part in their production. Toyota and Tesla said that they would temporarily suspend taking orders for specific car models due to the problem, while the auto industry believes shipments should resume in early 2023.
But there are more issues with new energy vehicles (NEVs) than merely chip shortages. Lithium battery supply has been a challenge. About 30–40% of the total cost of an electric vehicle (EV) is spent on its lithium batteries, which are a crucial component.
The expansion of the supply of EVs has not been able to keep up with the rapidly increasing global demand for them. Currently, ternary and LFP batteries are the two main categories of EV batteries. The former is mostly supplied by the “big three” of Korea—LGES, SK ON, and Samsung SDI—as well as by Panasonic of Japan and some Chinese producers. Similar to LFPs, a sizable portion is supplied by Chinese producers including CATL, BYD, and Guoxuan.
Given that it will take some time to add additional production capacity, the lithium battery shortfall in 2022 could be worse than the chip scarcity. Market watchers predict that until 2024, manufacturing will continue to grow significantly.
The supply of upstream minerals has been under pressure due to the high demand from battery manufacturers. Lithium carbonate, which is utilized in both ternary and LFP batteries, is the mineral garnering the most attention in 2022. Since the supply of lithium battery cores from mineral refinement is far behind the demand, prices have increased, which has an impact on the downstream battery and auto makers.
There is a momentum shift in supply
There is no sign of the competition for chip manufacture slowing down any time soon. Why is there still a need to fight for vehicle chips when consumer applications are so weak? In actuality, all of the major IDMs are awaiting foundry side production. The foundries aim to maintain fairness since they don’t want to offend any of their customers. As a result, they have dispersed each IDM with their potential car-grade production.
The majority of foundries are obligated to produce only commercial-grade applications for a considerable portion of their capacity, leaving them vulnerable to changes in consumer demand. This will result in an extremely divisive fourth quarter for the semiconductor sector.
The majority of industry-grade semiconductor manufacturing may be converted to automotive grade. This is why industry grade manufacturing was the first to be sacrificed during the 2021 car-grade shortfall. Even equipment makers were unable to supply equipment by early 2022 because of the chip shortage. It wasn’t until then that people understood how severe the issue was.
The industry has been switching to new designs that use more modern semiconductor manufacturing processes to address the lack of industry-grade chips, avoiding a conflict with the manufacture of car-grade chips, which mostly depends on established processes. The macro climate is, however, having an adverse effect on the semiconductor industry, which is slowing down its expansion and could lower the need for industry-grade chips.
Some segments of the automotive market’s demand are declining.
It’s important to note that the aforementioned interpretation is predicated on the assumption that the demand for automobiles from end users continues. Increasingly frequent global “black swan” occurrences have sparked discussions about decreasing demand in the car industry.
Europe market: Some European automakers have publicly warned that their orders have softened since their peak, caught between the oil crisis and the Russia-Ukraine conflict. Additionally, the energy crisis has prompted various governments in Europe to think about giving consumers’ everyday electricity use more priority. Car assembly may be impacted and factories may need to close.
Additionally, the price of NEVs has remained high due to escalating component costs. The advantages of owning a new car are beginning to wane in the eyes of consumers. The German government’s decision to stop providing subsidies by the fall of 2023 is another factor that raises fears of the small- and compact-NEV market collapsing.
China market: In the second half of 2022, China will cut in half the purchase tax on fuel-powered vehicles. Fuel vehicles are promoting price reductions in order to make up for the weak sales in the first half brought on by the COVID lockdowns. Some NEV manufacturers are pushing price reductions in the face of significant drops in orders from car owners after observing a demonstrable dip in orders. The profit margin is getting tighter as component costs stay high.
The largest NEV market in the world, China, is predicted to continue to grow rapidly in 2022. However, there is no new subsidy program in the works, thus the NEV purchase subsidies will expire at the end of 2022. Furthermore, it has been suggested that future NEV purchases will require taxation. NEV sales in China have climbed from 20% to 35%, which may be the cause of the rush by car owners to purchase NEVs.