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The global chip crisis is far from over, and the auto industry has been hit hard

Posted by: yiernuolashes 2022-12-11 Comments Off on The global chip crisis is far from over, and the auto industry has been hit hard

Nearly a year after a global chip shortage, many customers are facing mounting problems because of longer delays and fewer sales, according to the Wall Street Journal.

Manuel Schoenfeld ordered transmission chips for utility monitoring equipment in May. But he was told the chips would arrive in summer, fall and winter. But now suppliers are giving them the expectation that the chips won’t arrive until May 2022.

“It’s far from over,” Mr. Schoenfeld said.

There is no doubt that global semiconductor shortages are growing, wait times are longer, and buyers are stockpiling products and potential final expectations that are unlikely to materialize next year. Demand has not slowed as expected. Supply routes are blocked. Unpredictable production disruptions have battered factories that were already operating at full capacity.

What remains is general confusion among manufacturers and buyers. Some buyers trying to place new orders will get a delivery date in 2024, said Ian Walker, director of operations at Princeps Electronics Ltd., an Electronic components distributor that helps companies find chips.

“It feels like we’re running out,” Mr Walker said.

Revenues fell across the board as the $464 billion semiconductor industry has been unable to keep pace with supply. The pain is spreading from initially affected businesses, such as automakers and home appliance makers, to producers of other products, including medical devices and tobacco. The smartphone industry will grow just 6% year-over-year this year due to chip issues, according to Counterpoint Research, which tracks handset shipments, half less than initially forecast earlier this year.

Chipmakers say a lack of supply has caused them to lose business. “Trust me, if we weren’t constrained by the rest of the industry’s component supply chain, we would have shipped more,” Intel CEO Pat Gelsinger said on the company’s earnings call last week. Mr Gelsinger has said he expects the shortage to continue until 2023.

  The global chip crisis is far from over, and the auto industry has been hit hard

Chip delivery wait times over the past 13 months

Over the past year-plus, wait times for chip deliveries have continued to climb, finally surpassing the healthy threshold of 9-12 weeks. Over the summer, the average core wait time for chip deliveries stretched to 19 weeks, according to Susquehanna Financial Group. But by October, it had grown to 22 weeks. The company says the scarcest parts take longer: 25 weeks for power management components and 38 weeks for microcontrollers needed by the automotive industry.

Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said six months ago he thought the chip shortage would start to ease. But now he says they could last until 2023. Wells Fargo Investment Institute recently cut its U.S. GDP forecast to 6.3% from 7%, as chip shortages limit the supply of consumer goods.

“It’s been a lot longer than we initially thought,” Mr Wren said.

This year’s supply rebound relies on optimistic assumptions that production, which has already reached its limit, will not face further setbacks. But the chip-making process has been under pressure from start to finish.

Basic materials such as substrates are in short supply. Incidents caused by severe weather and fire interrupted wafer production. The virus outbreak and subsequent closures of factories in Malaysia specializing in product packaging have weakened the final stages of manufacturing.

Global shipping restrictions have increased disruptions and delays. According to a report by Accenture and the Global Semiconductor Alliance, chips may need to be transported more than 25,000 miles around the world before they can be assembled into devices.

Sourcing chips has become almost a gamble, industry experts said, leading to over-ordering that creates more supply crunch. “People are buying a lot of parts just in case, and that’s exacerbating shortages,” said Willy Shih, a professor of management at Harvard Business School who specializes in semiconductors and supply chains.

  The global chip crisis is far from over, and the auto industry has been hit hard

TSMC U.S. factory under construction

Inventories could also lead to higher demand, analysts warned, raising concerns that an industry-wide increase in supply could lead to a chip glut. Major chipmakers such as TSMC Co Ltd, Samsung Electronics Co Ltd and Intel have announced ambitious investments to increase production capacity, but the facilities cost billions of dollars and take years to become operational.

The auto industry, hit hard by chip shortages early on, has been calling for more supply. TSMC, the world’s largest foundry chipmaker, has boosted auto chip production by 60% this year, but automakers have struggled to recover as factories continue to close and estimated losses mount.

On Wednesday, General Motors Co and Ford Motor Co both reported sharp declines in third-quarter profits as a shortage of computer chips hit factory output. Both companies said they expect the semiconductor situation to ease over the next year.

“No one expected it to be as challenging as it is now,” said Ambrose Conroy, founder of supply chain consultancy Seraph. “We’re not going to be ahead of this for a long time.”

Even companies considered to have well-established supply chains, such as Apple Inc and Tesla Inc, are noting challenges in meeting customer demand, as a lack of key components has weighed on production and weighed on revenue growth. Other businesses have also begun to warn investors of the long-term impact.

Last week, Philip Morris International Inc. estimated that it missed hundreds of thousands of unit sales of its IQOS smoking device, a heated smoking stick sold as an alternative to traditional or e-cigarettes, this quarter. Executives said that number could reach 1.5 million in the second half of the year. The chief financial officer, Emmanuel Babeau, said that while the situation may improve in the first half of 2022, it is also possible that the problems will continue into 2023. “I have to admit, at that stage, nothing is completely clear,” he continued.

Frans van Houten, chief executive of medical equipment supplier Royal Philips NV, said in the company’s most recent earnings report that the company’s third-quarter sales fell by 150 million euros, equivalent to $174 million, and therefore lowered this year’s sales. and profit growth expectations.

Power monitoring equipment company PowerX said the lack of components has eaten into the company’s profit margins and cost it millions of dollars in outstanding equipment orders. The company has paid as much as five times the usual price for small-volume supplies. Mr. Schoenfeld said the manufacturer’s promised shipment of 20,000 chips failed because he was told the factory had burned down.

PowerX said it has nearly six months of inventory, while a startup like his would take around six weeks.

“We’re already starting to worry about what happens when the chip runs out,” he added.

Chip shortage with no end in sight

Earlier this year, the chip shortage seemed likely to ease sometime in 2022. Now, that forecast seems optimistic.

“The shortage will continue indefinitely,” Brandon Kulik, head of Deloitte’s semiconductor industry practice, told Ars. “Maybe it doesn’t mean 10 years, but of course we’re not talking about quarters. We’re talking about years.

As with many thorny problems, there are many causes of chip shortages, and none of them can be fixed quickly.

On the one hand, people keep buying new phones, tablets, and laptops, and they continue to use network-intensive services such as video streaming, video conferencing, etc., which increases data center usage. “Demand in almost all markets in general continues to grow,” Kulik said.

This appetite is in direct conflict with various supply shortages. Recently, substrates constituting printed circuit boards have become scarce. Compared to advanced semiconductors, PCBs are relatively low-margin and easy to manufacture. Most chip companies don’t make their own chips, but without a PCB, semiconductors can’t communicate with other chips in a computer. The company making the board isn’t making a ton of profits that can be reinvested in expanding production.

To make matters worse, a fire at a major substrate factory in July 2020 took a vital source offline. As a result, the capacity of PCB factories is expected to lag behind demand in the coming years. The crisis has become so severe that Intel CEO Pat Gelsinger mentioned it on his company’s most recent earnings call.

Even the richest semiconductor manufacturers in the world are being overwhelmed, and they are a long way from meeting demand. The construction and optimization of new fabs take years, and companies are hesitant to invest if they believe the surge in demand is temporary. While demand has risen, it is unclear whether it will continue after the pandemic. Companies are reluctant to invest in a new fab if there is a high probability that the new fab will not operate 70% of the time. Fabs are too expensive.

“If you’re running at 60 percent or 70 percent utilization, you can lose money,” said Robert Maire, president of Semiconductor Consultants.

Leading fabs cost around $5 billion to $10 billion, several times what they cost a year or two ago. As manufacturing technology has advanced, the buildings themselves have become more expensive to construct, and the machines that make the chips have become more expensive. The newest tools use extreme ultraviolet lithography, which is necessary to produce chips with features smaller than 7 nanometers, and they sell for as much as $120 million apiece.

Despite dizzying costs, many manufacturers are incrementally adding capacity through new construction at existing facilities, Kulik said. Larger projects are also underway. Intel, Samsung and TSMC have all announced new fabs in recent months. But none of these facilities will come online for several years, in part because the facilities require extensive supporting infrastructure, from power plants to fresh water supplies.

The new fab also needs to be staffed. “There’s still a talent shortage,” Kulik said. “It’s not just that we need more production lines, we need more people.” Universities, community colleges and companies are working to increase the number of trained workers, but those efforts will take time to bear fruit.

Many other problems piled up, from factory fires to shipping delays. In March, a fire destroyed a fab owned by Renesas Electronics. The Japanese company, a major supplier to the automotive industry, is already working overtime to make up for lost capacity at another automotive supplier, Asahi Kasei Microdevices, which suffered another fire at one of its fabs in October 2020.

Shipping delays that have plagued many other businesses have not spared the semiconductor industry, either. Chips often move rapidly across the globe on their way from silicon wafer to final product.

Other setbacks were temporary but still devastating. A deep freeze in Texas in February cut half of the state’s power generation, affecting production at Samsung’s Austin plant. This summer, the COVID-19 outbreak in Malaysia forced the closure of chip packaging plants.

All of this extends chip lead times. At the end of last year, a typical order took 13 weeks to complete; now it takes nearly 22 weeks. Buyers have no choice. Before the pandemic, many had embraced lean manufacturing, an approach that requires companies to keep very few parts in stock. But now, with longer lead times, companies are placing more orders and holding more inventory, hoping they won’t get caught without the chips they need.

“I’ve talked to semiconductor users who have used just-in-time manufacturing in the past,” Maire said. “They have started stockpiling a year’s worth of parts to offset any potential shortages.”

As manufacturers gradually add to existing facilities, Kulik said we may see some shortages ease more quickly than others. Such additions typically take 12-18 months to complete. However, he said, a brand new fab will take two to three years. Given the long lead times today, adding capacity may not be enough.

“I expect there will still be shortages until a lot of new capacity comes online,” Kulik said.

Global chip crisis hits automakers hard

Ongoing disruptions caused by the Covid-19 pandemic and a worsening global semiconductor shortage hit the auto industry hard in the third quarter, as the world’s largest automaker reported a sharp drop in revenue and production, making it difficult for dealers to source.

In Europe, the two largest manufacturers, Volkswagen AG and Stellantis, said on Thursday their new car production fell 35% and 30%, respectively, in the three months to Sept. 30, as a shortage of semiconductor components led to unfinished sales. of cars piled up at the factory.

Affected by the disruption of chip production in Asia and the United States affected by the new crown pneumonia epidemic, snowstorms in Texas, and fires in the eastern United States, the supply of chips required for core automotive components slowed to a trickle in the third quarter…

“All of this has slowed our strong recovery in the first half of the year,” VW Chief Executive Herbert Diess told reporters on Thursday.

In the U.S., General Motors Co and Ford Motor Co said on Wednesday profit and production fell sharply in the third quarter due to a chip crunch, and said chip shortages will continue to hit production and leave dealerships nearly empty by next year.

Amid generally weak global equities, auto stocks were pressured by quarterly earnings. Publicly traded preferred shares fell sharply in the opening session, down 3.29% by morning trade. Stellantis shares initially rose in early morning trade in Milan but retreated by midday, when shares were almost unchanged from the previous close. Shares in Bayerische Motoren Werke AG fell 1.5% in next week’s announcement, while Daimler’s shares fell 0.7% in Friday’s announcement.

European auto stocks followed a decline in the U.S. and Asia. General Motors shares closed down 2.1 percent on Wednesday, while Ford shares closed down 2.7 percent. Toyota Motor Corp fell 0.2%, while Nissan Motor Co, Japan’s second-largest automaker, fell 0.85%.

Looking ahead, auto executives expressed optimism that chip supply is starting to stabilize, but stressed that shortages and their impact on production will continue to be felt in 2022.

“Semiconductor visibility remains a conundrum for the semiconductor industry and for us. I think we’re on a better track now, we’re seeing some stabilization in supply and our monthly production has improved,” Stellantis Chief Financial Officer Officer Richard Palmer told reporters on Thursday.

Chip shortages may peak in the third quarter, but restrictions will continue to ease as the semiconductor manufacturing industry takes time to expand capacity, Mr. Diess said.

“We should be going through the worst of it now,” he said. “It’s going to ease up a bit, but it’s going to be an ongoing struggle for us.”

Shortages have had a mixed impact on earnings.

Volkswagen said in its interim report that operating profit excluding special items fell 12 percent to 2.8 billion euros, or $3.25 billion, and a corresponding profit margin of 4.9 percent in the same period. Revenue fell 4.1 percent to 56.93 billion euros, but beat analysts’ estimates of 54.66 billion euros compiled by FactSet. Profit after tax rose by 5.6 percent to 2.9 billion euros.

For 2021, Volkswagen reiterated its forecast of an operating profit margin of 6.0% to 7.5%. However, it lowered its full-year guidance for customer deliveries, which is now expected to be flat from last year.

VW said it expects revenue to be much higher than in 2020, but VW Chief Financial Officer Arno Antlitz stressed that the chip shortage shows the company needs to work harder to increase productivity.

“After record results in the first half, the semiconductor shortage in the third quarter clearly shows that we are not yet resilient enough to deal with fluctuations in factory utilization,” he told reporters.

Stellantis, which doesn’t typically report profits in the first and third quarters, said the company’s global sales fell 14 percent to 32.6 billion euros. The company confirmed its profit target for the year.

Mr Diess said a huge lack of new cars at dealerships led to a surge in used car sales, which was an important profit driver for VW in the third quarter through higher financing income from VW’s internal banks.

To accommodate the shortage, VW also reallocated chips to higher-margin cars and raised prices.

General Motors, which cut North American vehicle shipments by nearly half between July and September, said on Wednesday that its third-quarter net profit fell 40%, while Ford reported a 23% year-on-year decline in net profit.

GM Treasurer Paul Jacobson said the impact of chip shortages should gradually ease in 2022, but did not see a strong recovery in production.

“In terms of the demand we’ve seen, I think there will be limited opportunities to build inventories,” Mr Jacobson said, adding that supply shortages are expected to keep consumer prices high.

The chip shortage should ease next year, and Ford expects to increase deliveries to dealers by about 10 percent, said Ford Treasurer John Lawler.

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