Smith Brain Trust / May 10, 2021

Cars Are About to Cost a Lot More. Here's Why.

How a COVID-Era Shortage Is Affecting Vehicle Sticker Prices.

Cars Are About to Cost a Lot More. Here's Why.

SMITH BRAIN TRUST  The era of the last lonely roll of toilet paper at home or on barren store shelves may have passed, but now there’s a new and (at least in some ways) more difficult pandemic-driven shortage to focus our attention on the once-obscure topic of supply chains:

Welcome to the age of the empty car lot.

The global auto industry is experiencing a massive disruption thanks to a confluence of factors that have made microprocessors, aka computer chips, almost impossible to get hold of, even though they’re an indispensable part of modern vehicles. And as new cars become scarcer as a result, used car prices are surging as consumers look for alternatives.

Suresh Acharya, a professor of the practice at the University of Maryland's Robert H. Smith School of Business and former chief scientist at JDA Software, has spent decades building statistical and optimization solutions in supply chain management, logistics and other areas. He helped explain how the chip shortage has left manufacturers hungry for basic components of their products—and how they helped create this mess.

Cars are more complex and chip-dependent than ever.

Each year, fewer cars come with a good old-fashioned manual transmission, but more can automatically parallel park, keep you in your lane or out of the bumper of the car in front of you if you get distracted. They also offer a bewildering array of internet connectivity and entertainment options. “We’re increasingly driving smart devices on wheels,” Acharya said. But while microprocessors today are as important to producing a car as steel or rubber, the auto industry appears to just be waking up that fact, he said.

Auto manufacturers made a bad bet.

Car sales slumped when COVID-19 hit last year, and most manufacturers responded by reducing orders for materials to produce vehicles, including chips from the biggest global production firms: Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung, based in South Korea. But then, Acharya said, demand for automobiles surged late last year—possibly due in part to economic stimulus payments in the United States. “So the manufacturers went back to their suppliers and said, ‘Hey, we’re back—remember those orders that we canceled? We’d like to place them again.’ Just to find out, of course, that the production capacity had already been booked.”

Tech firms swooped in as everything was changing.

While pandemic-driven layoffs, office closures and online schooling may have cut demand for cars, sales of other chip-dependent gadgets skyrocketed. “A lot of things happened at once: Many of us were working from home at the same time kids were attending school from home, and we needed a new laptop in the house. Or the kids weren’t going outside and needed computer gaming devices,” Acharya said. Unlike auto manufacturers, the tech industry is well aware that microprocessors are its lifeblood, and it reacted almost instantly to buy up unused chip manufacturing capacity. Although fairly simple car microprocessors are different than the high-end ones you’d find in a computer CPU or a PlayStation 5 graphics processing unit, they come off the same lines, which are running at nearly full capacity around the clock, he said.

Solutions are in the works, but they won’t be quick.

Samsung, TSMC and the U.S. firm Intel recently announced plans to create new microprocessor foundries—driven in part by the crisis, but even more by widespread rising demand for chips as society becomes ever more computerized, Acharya said. However, the capital investments required are extreme—$100 billion in TSMC’s case—and creating new manufacturing facilities is hard. “So it will help, but not overnight—more like in two, three or four or more years from now,” he said. Meanwhile, the Biden administration has worked to persuade chip manufacturers to provide at least some relief to auto manufacturers, who themselves are pursuing new strategies—for instance, building most of a car but skipping the chips for now to avoid shutting down their lines, Acharya said. Still, he predicts very significant shortages for a year or more.

Manufacturers need to rethink strategy.

Efficient “lean manufacturing,” with small amounts of stock on hand and right-on-time delivery, has been a business buzzy phrase for years, but the car industry inadvertently starved itself, Acharya said. “One cannot really argue against lean as a concept, but if you take ‘lean’ to the nth degree, what you do is create a single point of failure. Increasingly, organizations are learning that diversification and resiliency need to be built into the supply chain,” he said. A final thing to consider, he said, is the geographic concentration of microprocessor manufacturing in Asia. “More than 70% of the world’s computer chips come from Asia,” he said. “And when you put most of your manufacturing eggs in one geographical basket, you make yourself very vulnerable to disruptions, whether they’re political or natural.”

–This article originally appeared in Maryland Today.



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