“It will take a while to replenish the car industry’s chip stocks”
Reger sees three trends that together have led to the current situation with allocation problems in the car industry. The most important driver of the crisis goes back to the first half of 2020 – at that time, numerous customers from the auto value chain scaled back or put their orders on hold under the impact of the Covid situation with pandemic-related manufacturing disruptions.
“It was completely unclear at the time how the recovery of the market would proceed – whether as a “V-shape” with a short dip and a subsequent rapid recovery or rather as an “L-shape”, i.e. whether a longer down phase would follow after the crash,” said Reger “After thorough consultation, we had given a cautious guidance to the market at the time. But just four weeks later – I had never experienced this before – we had to revise our forecast upwards because within this short period of time the ordering behaviour of the entire supply chain had turned around dramatically.”
What had happened? The auto industry had seen that the market was collapsing and stopped ordering chips. So the foundries had to ask themselves who would pay them for the shortfalls when the orders from the auto industry fell away. They then gave their manufacturing capacities to customers in the consumer and mobile phone industries, because these were booming at the time – because countless office workers were suddenly working at home and had to upgrade their equipment accordingly. But then demand from the car industry suddenly picked up again – and hit an immovable obstacle in the form of the manufacturing processes in the chip industry. “It takes six to seven months to manufacture a semiconductor device – from the time you insert the wafer until a packaged and tested chip drops out of the back end. So until you reload the supply chain, it just takes that long. So that was the scenario we had last year: an empty supply chain followed by extremely high demand. “
Lesson to learn for the automotive industry: Semiconductor production takes more time than bending sheet metal (Click to enlarge; Source: NXP)
So much for the current situation. But there is also another, longer-term trend, Reger explains.
“This is about the question of supply sovereignty in America, Europe and Asia. What would happen, for example, if – just as a scenario – China were to reach for Taiwan? Would we then still be able to manufacture independently in Europe and America? How robust are these supply relationships? That is a scenario that is currently being discussed in politics.”
Besides the pandemic-related hiccups in the supply chain and the long-term political upheavals, however, there is a third factor that strongly influences the supply situation: the technological development. Reger sees this as a medium-term trend.
“If we assume that there will be 50 billion networked devices on the market in 2025, and even 100 billion by the end of the decade, then this will result in an extremely strong increase in the demand for efficient computing platforms that are needed for the “sense-think-act” chain of automation”, the NXP CTO said. This concerns semiconductor technologies in the range between 150 and 16 nanometres. This demand is just building up. “As a result, manufacturing capacity for these technology nodes is increasingly in demand. Building such capacity typically takes one to one and a half years.”
The question remains what needs to be done to fix, or at least mitigate, the problem of empty supply chains – and whether this can be blamed solely on the sourcing strategy of automakers and tier ones. “What we are seeing right now is a gigantic demand, not only from the auto industry, but also from other industries,” explained Reger. “A demand that we can’t meet at the moment. We’re supplying more than we’ve supplied in the last few years, and we’re manufacturing at record levels, but this demand for building smart, connected devices and just smart, connected cars is just increasing very massively.” All of this will mean that there will still be empty warehouses in the coming quarters, he said.
NXP is working on buffering the worst allocation needs, Reger explained. But he assumes that it will take a while before inventories are rebuilt. The bottom line is that just-in-time logistics is only of limited use for products that have such a slow supply chain as semiconductors. As a strategy to avoid such bottlenecks in the future, Reger suggests building up safety stock positions, at several points in the value chain. Alternatively, second sourcing would also be a possibility – but only a theoretical one. For many semiconductors, second sourcing would not be possible at all or would be extremely expensive because, after all, many of them are customised designs.
“In many areas, intelligent warehousing will be part of the solution,” believes Reger. “But all that takes time. And of course it’s not an NXP-specific problem, it affects the entire industry.”