The Semiconductor Conundrum in the Auto Industry

By Tavish McNulty | October 21, 2021

If there has ever been such a thing as a good time to buy a car, then the past year has most certainly been the opposite of that. No one can deny that the coronavirus pandemic has impacted almost every industry to varying degrees. Some of the most immediately impacted sectors were transportation, recreation, and educational services. A year after the initial recession, as the economy began to open back up, the ripples of the global economic shutdown started hitting these sectors and others. In particular, the automotive industry has been drastically affected by the backlog in supply created by the shutdown.

In my hometown, I live across the street from a Ford dealership. Every day, I would drive by the dealership and see hundreds of cars. Then, suddenly, around the end of July, it was as if almost all the cars had disappeared overnight. What happened? Where did they go? The reasoning for this disappearing act was not directly rooted in the car manufacturers themselves but down the automobile supply chain.

A modern car is a very complex machine containing tens of thousands of parts. One of these parts has become a very popular component during the pandemic. Most industries saw a fall in demand during the shutdown; however, the technology industry saw a huge increase in demand for their goods since that was the only way to communicate with others. All of these electronic goods need a semiconductor or computer chip in order to function. Modern cars are so technologically integrated that just one needs dozens to over one thousand of these semiconductor components. The unexpected demand for microchips, along with the new coronavirus restrictions, created a recipe for disaster in any industry that has this key component in its supply chain.

A positive demand shock coupled with an inability to produce at that demand creates a shortage. A shortage of key components creates a shortage in its supply chain. The automotive industry has been facing this catastrophe over the past year as car supplies decrease and prices soar. Dealerships that have many cars on the lot like the one in my hometown are emptied out in order to spread out the supply of the company’s cars across its other dealerships. Since there are so few new cars, used cars have become more desirable and have increased in price. Dealerships and used car dealers are in high demand for used cars to have some sort of inventory to sell to people. Therefore, this makes it actually a good time to be selling your car. Throughout the year, some car manufacturing plants have even been completely halted until the semiconductor bottleneck opens up.

The problem will most likely not get better soon at this rate either. The process of getting these semiconductors to the car manufacturers in the U.S. is a long one in itself. The pieces in a computer chip could be made in one country, then assembled in another country. Cars also use a kind of semiconductor that is relatively out of date. Since cars use so many of these chips, it’s more cost-effective to use the older and cheaper ones. The problem with this is that many of these semiconductor companies are trying to mitigate the production of these older chips in order to keep their profits stable. There are so many layers to the semiconductor conundrum that the automotive industry will need a restructuring of its supply chain.

The government has tried to alleviate these setbacks. Earlier this year, some may remember President Biden signing an executive order on the matter. The order set into place a 100-day review of the U.S. semiconductor industry, along with other products, and encouraged cooperation with the major computer chip companies to promote production. Although the U.S. has some of the largest semiconductor companies, a majority of production facilities are overseas in Taiwan and China. This accounts for further issues as shipping and transportation have also been slowed by the pandemic.

Even though there have been some improvements, we still face this problem in our automobile industry both in the short and long run. The reason why we care so much about its impact on the automotive industry is because the United States is the second-largest producer of cars in the world. Car manufacturing accounts for over 900,000 U.S. jobs according to the U.S. Bureau of Labor Statistics and 45 billion dollars of U.S. exports. Manufacturing plants being shut down means that tens to hundreds of thousands of people could be out of their job. The pandemic has certainly tested the vulnerability of our supply chains. We have been met with a wake-up call to protect not only our own manufacturing industries, like the automotive industry, but the other components that make them possible. So, when you go to buy a car, keep in mind the macroeconomics of the car market, which means, at least for now, consider holding off on the purchase.

Edited by Joseph Barbieri