What causes the recent shortage of automotive chips?

Recently, an unexpected power outage occurred in Dresden, Germany, the capital of Saxony and one of the largest semiconductor clusters in Europe. The power supply in the whole city was abnormal for two hours. According to Bloomberg, Infineon's factory was closed until Tuesday night. Bosch managed to restart operations on Monday afternoon, but Bosch said it was still assessing the losses of its 1 billion euro factory. GlobalFoundries Inc. said that the impact on the Dresden factory was limited due to the energy supply of the energy storage system.

Some time ago, the epidemic in Malaysia, known as the world's "semiconductor packaging and testing center", rebounded. A factory of STMicroelectronics, a global chip giant, was collectively infected and the factory production was forced to be interrupted many times. The resulting chip supply shortage has spread to the automotive industry. Malaysia is an important part of the global semiconductor industry, and its semiconductor packaging and testing capacity accounts for 13% of the world's total.

Title image: Semiconductor industry near Dresden

1. Why does the chip shortage have a serious impact on the automotive industry?

Automotive chips are the foundation of automotive electronics. Generally speaking, automotive electronics is the general term for all electronic devices installed in a car. Let's take a simple car door as an example. If it wants to achieve automatic locking at a certain speed, remote locking and unlocking, and automatic glass roll down, it is inseparable from chips. Usually, chips exist in three types of components, including sensors, electronic control modules, and actuators.

Figure 1 A simple car door requires a lot of information

From the perspective of the classification of automotive electronic functions, automotive electronics mainly include basic parts such as sensors, controllers, and actuators (including external mechanical structures).

1) Sensor (equivalent to the five senses of human): Its main function is to convert physical quantities into recognizable electrical signals. Generally, it collects the information and status of the required objects for the controller. It is also a very important chip in the car. From the perspective of physical quantities, sensors help cars collect information that is useful to the car, such as temperature, pressure, speed, acceleration, etc., and then transmit this information to the electronic control module.

2) Electronic control module (equivalent to the human brain): It is the brain that processes information in the car, with MCU and SOC chips as the core, including various power circuits, communication circuits, input processing circuits and output power circuits.

3) Actuator (equivalent to human limbs): The actuator in the car is used to execute the control signal sent by the electronic controller and is a load for the electronic module.

With the development of the automobile industry and the increasing expectations of consumers, manufacturers are paying more attention to improving automobile safety, reducing energy consumption, improving comfort, and adding entertainment and auxiliary functions to improve the competitiveness of automobile products. So at present, the smarter a car is, the more intelligent control modules and sensors it has, and the more chips it needs. For microcontrollers , a car often needs 40-80, plus various sensors and various other chips with specific functions. There are even more than 1,000 main large chips on a single car, not to mention various discrete devices (diodes and transistors) and passive devices (resistors and capacitors we are familiar with). Usually a car needs 4,000 diodes, 1,200 transistors, 50,000 resistors and 60,000 capacitors.

Figure 2: More luxurious vehicles have more chips

It can be said that automotive chips make our vehicles more and more intelligent and more comfortable to use, but chips have also become a very important part of the car. In extreme cases, the supply of chips has become the Achilles heel of automotive supply chain management.

2. Why is there a chip shortage?

Overall, the shortage of automotive chips is mainly due to an imbalance between supply and demand. The supply side is in short supply due to various natural and man-made disasters, which makes the so-called bullwhip effect in the supply chain more and more serious. All companies in the supply chain need to increase additional inventory, making the chip shortage situation worse.

Let's first review the shortage of automotive chips. Starting in December last year, Volkswagen Group, Continental and Bosch began to issue the first chip shortage in the automotive industry from the perspective of supply chain shortages. The shortage of automotive chips from December last year to February 2021 was mainly due to the imbalance caused by the mismatch between supply and demand. The sudden outbreak of the epidemic in 2020 caused a sharp drop in automobile production in the second quarter of 2020, which caused the demand for automotive chip manufacturers in the second half of 2020 to plummet. When global automobile production recovered in the third quarter of 2020, the large amount of demand and the recovery of consumer electronics together put tremendous pressure on the upstream chip supply. It can be said that this round was caused by a short-term imbalance between supply and demand.

As the recovery time gets longer and longer, the automotive industry has found that the main shortage of chips is MCU microcontrollers. As mentioned earlier, a large number of MCU microcontrollers are used in automotive control modules. Due to the need for chip miniaturization and high frequency, MCU requires a process below 40 nm. Most IDMs outsource chip production to foundries such as TSMC. TMSC produces and ships about 70% of the market share of all automotive MCUs. Since the market for automotive MCU chips is also highly concentrated, the top 7 MCU suppliers account for about 98% of the demand. The bottleneck at the time was TSMC. Since the automotive business only accounted for 3% of its total revenue, TSMC had its own considerations in processing other chips or automotive MCU microcontrollers. However, with the mediation of governments and car companies, TSMC's bottleneck was gradually broken, and the shortage at this stage gradually eased after April.

During this process, a rare snowstorm in the semiconductor production center of Texas caused a shortage of electricity, and several large chip companies were forced to shut down to save electricity. A fire broke out at the semiconductor factory of Renesas, one of the world's largest automotive chip companies, and other reasons. In July, the epidemic in Southeast Asia intensified, and the factory of an automotive chip supplier centered in Malaysia was again required by the local government to close some production lines until August 21 after the previous shutdown for several weeks. This directly led to the deterioration of chip supply. The shutdown of chip manufacturers also led to difficulties in the supply of Bosch's ESP/IPB, VCU, TCU and other products. As the world's largest automotive supplier, Bosch's supply gap in chassis and safety components has had a major impact on all vehicle companies in the world.

As this background continues, a very obvious bullwhip effect has occurred in automotive chips. The bullwhip effect is a phenomenon in which demand information is amplified step by step during the transmission process. This is most typical in the case of automobiles. The end customer is the car owner, the dealer is the 4S store we are familiar with, the manufacturer is the vehicle manufacturer that produces the car, and the supplier who directly supplies the vehicle manufacturer is called a first-tier supplier. The information distortion process in the supply chain mainly includes three keywords:

1. Demand information, including orders and forecasts

2. The delivery process passes through multiple distributors and suppliers.

3. Zooming in step by step, the amplitude at the tail of the supply chain is the largest.

Due to the continued shortage of automotive chips, all automakers and suppliers have been forced to abandon their zero inventory strategy. The demand for chips is very large, which has caused chip companies to receive a large number of orders and demands, which they cannot finish.

Figure 3 Bullwhip effect in the automotive supply chain [1]

In fact, the production of automotive chips is also affected by the problems of automotive chips themselves:

• The production chain is long and the supply is insufficient: from raw materials to chip products, including design, manufacturing, packaging, and testing, the production chain has fine division of labor and factories cover the world. Problems in any link will affect chip production capacity. The shortage of automotive chips has various reasons in terms of wafers, manufacturing, and packaging and testing.

Figure 4 Chip design and manufacturing process

• Long production cycle: Since the chip industry chain is relatively long, it usually takes 24 to 26 weeks from raw materials to chip products. When supply chain disturbances increase, the supply time continues to lengthen. Automotive-grade chip production requirements are high and profits are low: Compared with consumer-grade chips, automotive-grade chips have high profits and low profits, and their output value only accounts for about 10% of the total industry output value, and their voice is low. With the growth in demand for consumer chips and overall insufficient production capacity, chip manufacturers are more willing to produce consumer chips with high profit margins.

So from this logic, the shortage of automotive chips is also inevitable in the current environment. 3. What is the industry layout of automotive chips? As mentioned earlier, there are four major links in chip production: design, manufacturing, packaging, and testing. Only a few companies can complete the four links independently. In order to pursue higher profit margins, the automotive chip industry has adopted a large number of outsourcing services. The main suppliers of automotive chips include the top ten suppliers, mainly Infineon, STMicroelectronics, and NXP. These giants have design capabilities and layout the links with lower added value in packaging and testing, which are concentrated in labor-intensive areas. At the same time, as automotive parts suppliers accumulate experience, they have designed proprietary automotive chips. For example, Bosch solidified a lot of knowledge in the design and designed its own dedicated chips.