How Chip Shortages Create a Car Crunch

A car dealer in Utah said he had 25 Ram pickups rather than 200. At four, his supply of Silverado trucks was even more distressing.

This car dealer was not alone. Globally, a semiconductor chip shortage has many people worried.

Chip Shortages

We can start with a miscalculation. Assuming sales would be down this year, auto manufacturers ordered fewer chips for fewer cars. Then, as inventories shrunk and Ford, GM, and Volkswagen announced temporary shutdowns, demand resurfaced. Compounding the shortfall, smarter cars need more chips for components that range from power steering and brake sensors to entertainment systems and rear view cameras:

The March 2021 auto numbers are far below totals from previous years. As a result, customers wait longer, pay higher prices, and have fewer choices:

From here the problem gets worse.

Taiwan’s chip makers have less of the water they need in their factories because the typhoons passed them by this year. Meanwhile, in Japan, semiconductor factories were constrained by an earthquake and in Texas, it was the severe weather. Then, to top it all off, demand for consumer electronics surged.

Our Bottom Line: Land, Labor, and Capital

Extending over considerable land, using skilled labor, and requiring massive amounts of capital, the semiconductor chip makers have a problem with factors of production “recipes” that were created in a pre-pandemic world. They expected their customers would need more sophisticated chips for 5G and servers. Instead, the pandemic hit, and orders surged for appliances, consumer electronics, and cars. Their flexibility was limited.

In this video, seeing the land, labor, and capital in a semiconductor factory in Taiwan (and what a chip is), you can start to grasp why adjusting to unexpected demand would be tough:

You will also know why a car dealer in Utah is short on trucks.

My sources and more: A crisis can have many causes. For chip shortages, we can look at a drought in Taiwan, auto maker miscalculations, and the temporary factory shutdowns that are creating limited inventory. Finally though, if you read just one article, do look at this very readable chip shortage analysis from Penn Today.

Our featured image is from Penn Today.