Is the Global Chip Shortage a Thing of the Past?
Supply chains and microchip availability are improving, but new car production still faces challenges.
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Before the 1970s, the only chips found in automobiles were most likely the potato type. Today, many of those chips are semiconductors, and they are essential for everything from engine and transmission control to advanced safety features and high-tech infotainment and communication systems.
Most consumers probably gave little thought to the tiny chips controlling their vehicle's features until the COVID-19 pandemic in early 2020 caused a chip shortage, and the automotive industry's reliance on them became painfully apparent.
COVID-19 Shutdowns Upended the Microchip Marketplace
Before spring 2020, consumers had little reason to worry about the prospect of a microchip shortage or the disruption of global supply chains. When you ordered a new vehicle, it typically arrived in a reasonable amount of time and came with all the features you ordered. That changed that March, when the COVID-19 pandemic very quickly shut the world down and automakers shut down with it.
With most people now confined to their homes, the demand for personal electronics and home entertainment devices rose dramatically. As demand for these products rose, the shuttered auto industry's chip requirements fell, and semiconductor manufacturers shifted supply to meet the changing market.
Chip manufacturers were operating at close to capacity even before the pandemic. With lockdowns and other restrictions hampering the global supply chain, they struggled to increase production. As the auto industry also discovered, companies producing consumer electronics such as smartphones, televisions, and gaming devices were willing to pay more for microchips, which made the auto industry's demands a lower priority.
Automotive production was shut down for only a few months, but by the time car companies started getting factories back online, the chips they needed for new vehicles were in short supply. Carmakers were forced to limit production or, in some cases, ship vehicles with missing features, promising to add them later.
Carmakers Have Adapted to the Post-COVID Chip Supply
In the year leading up to the pandemic, more than 17 million new cars were sold annually in the U.S. In 2022, amid the chip shortage and other supply chain challenges, just 13.8 million vehicles sold, with major brands including Stellantis, Nissan, Honda, and Toyota reporting significant declines.
According to automotive data analysts at S&P Global, the chip shortage's effect on new car production had waned by the middle of 2023. While the supply of semiconductors was still restricted, this had become the new normal, and vehicle manufacturers were now able to predict their availability and plan production accordingly.
Even so, longer wait times for new vehicles became the norm, and there were instances of vehicles arriving with missing components. In some cases, a delivered vehicle would show a price credit for missing features such as parking sensors or heated seats. These features were left off the vehicle rather than hold up its production to wait for the necessary microchips.
As a good indication that car companies are now seeing significant improvements in their ability to produce vehicles, more than 15.5 million vehicles were sold in the U.S. in 2023, a 12.7% increase over the dismal sales of 2022. Almost every car company saw growth last year. Sales are still below pre-pandemic levels, but they are trending in the right direction.
Other Supply Chain Challenges Continue to Cause Disruptions
While the effects of the chip shortage are waning, other supply chain disruptions continue to dog the industry. Earlier this year, Volvo and Tesla reported a suspension of production in Europe due to a parts shortage caused by attacks on international shipping in the Red Sea by Iran-backed Houthi militias.
Not every delay is caused by supply problems. Production of the 2024 Ford F-150 was delayed and shipments of the electric F-150 Lightning were halted earlier this year, but Ford blamed these disruptions on undisclosed quality issues rather than supply chain problems. However, other markets still are facing supply chain and shipping troubles. Ford of Australia has apologized on its website for the wait time caused by global supply chain and manufacturing challenges.
As of March 2024, Chevrolet still shows this message when configuring a vehicle: "Due to supply chain shortages, certain features shown have limited or late availability or are no longer available." A similar message saying that some features and options may not be available appears when configuring a new Dodge or Chrysler.
The U.S. Aims to Boost Domestic Chip Production, but It May Take a While
In August 2022, President Biden signed the CHIPS and Science Act, which was designed to increase investment to the tune of about $53 billion in U.S. semiconductor manufacturing, research, development, and workforce. As an additional incentive, the law provides a 25% tax credit for capital investments in semiconductor manufacturing. Most chip production occurs overseas, and the Biden administration is looking to reduce America's reliance on foreign chip makers while boosting supply. At the same time, the act restricts the export of chips to China.
Even so, producing semiconductor chips is a complex, lengthy process, and the investments needed to build chip-making facilities are extensive. Finding skilled labor to work in these plants is also a challenge. According to Fortune, it takes much longer for a U.S. chip-making facility to hire skilled workers than it takes in other countries. The report estimates there could be as many as 115,000 new tech jobs in the semiconductor industry in the U.S. by 2030, but many of those positions may remain unfilled due to hiring challenges.
Although the auto industry generally is no longer experiencing wide-scale disruptions caused by chip shortages, demand for chips continues to grow and can still outpace supply. Electric vehicles use twice the number of semiconductors as an internal combustion engine car, and as EVs continue to grow in numbers, so does the demand for microchips.
For now at least, the news is generally good. According to Cox Automotive, new vehicle inventory should reach pre-pandemic levels in 2024, which should also result in more incentives and discounts for buyers.
