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Automotive semiconductor supply constraints expected to resolve by second half of 2021
23 December 2020
A supply shortage in semiconductors for the automotive market is
expected to cause temporary disruption, but suppliers expect to
absorb the demand based on the light vehicle production forecast
for 2021.
With demand falling for most part of 2020 due to the COVID-19
pandemic, automakers and tier-1 suppliers have reduced their
inventory. Automotive semiconductor vendors have canceled orders to
external foundries, while internal capacity was halted or slowed
either intentionally or as a result of reduced labor availability
due to the pandemic.
However, with industries opening up in the last couple of months
and automotive demand increasing, there are signs of disruption in
the supply chain. Last week, key suppliers and OEMs suggested the
shortage of semiconductors could affect vehicle production in the
world's biggest vehicle market, mainland China. This was confirmed
by the China Association of Automobile Manufacturers (CAAM), which
has suggested a "relatively big impact" in some automotive
production at first three months of 2021 owing to the shortage. Top
chipmakers have also acknowledged this shortage, and price
increases may result. These chips are primarily used in Electronic
Stability Program (ESP) and engine control units (ECUs).
Additionally, there have been reports of supply issues for imported
microcontrollers, leading to reduced ability to deliver to the
automotive market demand in India.
Multimarket demand weighs on semiconductor
supply
The auto industry's recovery in the third and fourth quarters of
2020 has begun to put some signs of stress on the supply chain. In
one example, IHS Markit estimates that the demand for
semiconductors across other industries in the final quarter of 2020
increased at a stronger-than-expected rate. The increase in
production of new smartphones leveraging 5G capabilities and the
recent introduction of new gaming platforms, including Sony's
PlayStation 5 and Microsoft's Xbox Series X, resulted in these
segments consuming the front-end capacity available due to earlier
cancelations by automotive manufacturers while demand was low and
the prospects for recovery were unknown. Adding to it, with
Christmas and Chinese New Year coming up, spare capacity is in
short supply, especially at the external foundries.
The growth of xEVs (x = mild, fully hybrid electric vehicles) is
driving the increasing need for semiconductors in the automobile
industry, given that xEV systems require considerably more
semiconductor content than conventional propulsion systems. These
hybrid and fully electric vehicles (EVs) often are equipped with
more advanced driver assistance systems (ADAS) and infotainment
features. These advanced entertainment systems, digital clusters,
heads-up displays (HUDs), safety features, and ADAS technologies
require systems-on-chip (SoCs) designs that need highly advanced
process nodes and that are likely to put added pressure on the
already-constrained foundries.
A return to normalcy?
"The current challenges are not structural problems that require
capital expenditure increases to fix, these are a result of a
perfect storm of non-automotive segments consuming wafer fab
capacity with new products before the holidays, said Phil Amsrud, a
senior principal analyst with IHS Markit. With Intel's historic
order with Taiwan Semiconductor Manufacturing Company (TSMC) before
the automotive recovery began taking shape, coupled that with
automotive customers having to share the highest priorities with
other segments, it appears that the first half of 2021 will be a
difficult period for the industry."
In an opportunity to overcome the supply issues, some suppliers
are reconsidering their internal wafer capabilities and priorities
and looking at options to bring some of the production back in
house because of the foundries' constraints. Raising prices is also
an option for some suppliers, but the circumstances are a bit
complicated with 2021 contracts just starting. The suppliers are
also looking to lock down longer commitments from customers, which
would provide long-term visibility for capacity planning and
minimize risk of suppliers being stuck building risk inventory.
"The challenges will remain until lead times begin to decrease
to less than 26 weeks and become in line with the usual 12-16 weeks
for MCUs [microcontrollers] and SoCs," said Amsrud. He added, "The
effect of this increase in lead time will affect MCUs and SoCs
compared with other product types because MCUs have proprietary
architectures and are therefore difficult to move from one supplier
to another. On the other hand, memories, standard logic, discretes,
and power devices usually have multiple qualified suppliers."
Currently, there are no signs of an upcoming long-term
allocation crisis, however the real risk for an allocation crisis
to develop like in that 2010 is if tier-1 suppliers and automakers
begin panicking when faced with an extended lead times and order
more than what is required. Inflated orders would result in
suppliers misinterpreting the actual demand, which could lead to a
significant imbalance between demand and supply. It could lead to
more shortages in the first half of fiscal 2021, especially for
multipurpose chips such as microcontrollers, resulting in the need
for an inventory correction to absorb all the excess chip
production in the second half of 2021.
Semiconductor suppliers should be able to absorb the demand
based on the light vehicle production forecast over the course of
2021. Despite lead time significantly increasing, there are likely
to be only few anecdotal episodes of shortages on high-demand
vehicles such as pickup trucks in the US and not industry-wide
disruptions.