Uncovering the truth about the automotive semiconductor crisis

Taking all of this into account, we believe that as the automotive industry's procurement and development methods diversify, some operators in the semiconductor industry are also forced to reconsider business relationships due to inventory risks.

3. Duplicate orders and supply chain squeeze

From 2020 to 2021, semiconductor manufacturers' automotive semiconductor sales increased by about 30%, and the sales base also increased by about 20%. The supply volume increased as the demand of the automotive industry recovered. Despite this, the difficulty in procuring semiconductors still has a negative impact on the production of current vehicle manufacturers. We believe that the main reason is that repeated orders have led to disordered semiconductor competition, which in turn squeezed the supply chain.

According to the existing operating model, most vehicle manufacturers do not purchase semiconductors directly from semiconductor manufacturers or distributors, but purchase them through first-tier automotive suppliers or trading companies. When there is a scramble for parts in the procurement market, suppliers will double or triple their orders, resulting in surpluses and shortages in each sub-component that makes up the auto parts. Even if only one part is missing, the auto parts cannot be completed, and the throughput of the entire supply chain will deteriorate. Even if the supply is restored, the competition will start again, breaking the balance between supply and demand. From the perspective of vehicle manufacturers, the continued shortage of semiconductors indicates that there are shortcomings in the procurement of parts, and for this reason, the quantity will be further increased, and first-tier suppliers will need to further bargain with semiconductor companies, thus forming a vicious circle.

We believe that due to this information asymmetry, repeated orders that exceed actual demand have become the norm. Unlike most European suppliers who purchase directly from semiconductor manufacturers, the Japanese automotive semiconductor supply chain is characterized by the participation of many semiconductor trading companies. The advantage is that trading companies can set up inventory buffers in the supply chain. However, the current semiconductor shortage has led to a scramble for inventory among suppliers.

4. Build the next-generation automotive ecosystem

There are several ways to seek stable procurement when supply chains are disrupted.

For example, the approach of SMC Corporation, a large air compressor manufacturer. It has announced the establishment of a new "supply park" near its factory in Tono City, Iwate Prefecture, and is attracting suppliers on the condition that they will be given priority in supply. The advantage of the policy of partially bearing the equipment investment of each company in the region is that the investment amount on the supplier side is reduced. Even in the procurement of semiconductors, it may be effective to trace back to the upstream of the supply chain and ensure production capacity rather than inventory of necessary materials. However, as mentioned earlier, since it is impossible to predict the return on investment in traditional semiconductors in the future, it is conceivable that it will be difficult to demand an increase in production capacity by besieging suppliers, regardless of who bears the cost.

Another example is Daikin Industries, which has taken flexible measures to accumulate inventory. After the first wave of the COVID-19 outbreak, China took containment measures. Based on the experience of procurement obstruction, it has been working to build a strong supply chain without interrupting production lines. In addition to semiconductors, the inventory level of parts that may be out of stock has been increased, and appropriate allocations have been made according to the production conditions of each country base. It can be said that this is a case of capturing changes in the external environment and quickly reflecting business judgments in procurement strategies. However, as mentioned in the previous section, vehicle manufacturers rarely purchase semiconductors on their own. In the current procurement method through trading companies and first-tier suppliers, it is difficult for vehicle manufacturers to immediately take measures to secure semiconductor inventory according to changes in the supply and demand environment.

For products like automobiles that have a large number of parts, even if only one part is missing, the production of the final product will stagnate. In the absence of large-scale equipment investment to prevent the backlog of goods caused by duplicate orders, it is possible to consider the joint procurement of automotive semiconductors by vehicle manufacturers based on information sharing among participants in the supply chain. For example, the product information ordered by vehicle manufacturers is first summarized by all parties and then ordered from the foundry.

In order to implement these measures, many difficult issues need to be considered. For example, determining the needs of automobile manufacturers, the production status of semiconductor manufacturers, and the order cycle of different product types. In addition, it is necessary to consider the differences in inventory holding methods between individually designed semiconductor module products and discrete components. This can be eliminated by adopting a flexible method of holding semi-finished product inventory, which will make it clear to build inventory and procurement situations that are difficult to aggregate in the supply chain.

The U.S. electronics industry association SEMI established the Global Automotive Advisory Council (GAAC) in 2018 as an information sharing platform among semiconductor manufacturers, vehicle manufacturers and automotive suppliers, and discussions are already underway.

We believe that information sharing and a cooperative mechanism for jointly owning parts will help procure semiconductors for next-generation vehicles such as electric vehicles and self-driving cars. The future automotive semiconductor market will be dominated by ASICs that manage computing functions of integrated electronic control units (HPC: High Performance Computer), optoelectronic components that handle sensing, and semiconductor components that can withstand high voltage and high current (power semiconductors). In order to promote the popularization of this new semiconductor model, it is necessary to build a stable procurement environment, horizontal and vertical supply chain cooperation, and information sharing.

5. Conclusion

In this article, we analyze the reasons for the continued shortage of automotive semiconductors, which is mainly caused by information asymmetry leading to a mismatch between supply and demand. The current procurement difficulties indicate that the lack of an information sharing mechanism for inventory status is a loophole in the supply chain, which may be a bottleneck in the procurement of semiconductor products. For semiconductors with particularly long production cycles, sharing supply chain information related to supply and demand can help prevent a large supply and demand gap. In subsequent emergencies, the resilience of the supply chain needs to be reconsidered to avoid product backlogs again.