Global Auto Industry Hits the Brakes Amid Semiconductor Shortage Crisis

Volkswagen Halts Production and Closes Temporarily
Ford Shuts Down German Plant
Due to Increased Semiconductor Demand Amid COVID-19 Pandemic

[Image source=AP Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] The global automotive industry is facing production disruptions due to a shortage of automotive semiconductors. Last year, the industry was hit hard by the impact of the novel coronavirus disease (COVID-19), and while it is striving to recover, the semiconductor shortage is expected to cause another difficult period this year.

According to major foreign media on the 18th (local time), Audi, a key car brand of the Volkswagen Group, is experiencing delays in the production of some luxury vehicles due to a massive shortage of semiconductor chips used in vehicles.

Markus Duesmann, CEO of Audi, stated, "Some luxury car lines of the Volkswagen Group have had to halt production lines due to semiconductor shortages," adding, "As a result, more than 10,000 workers have been ordered to take leave."

The Volkswagen Group expects to be unable to produce 100,000 vehicles in the first quarter due to the shortage of automotive semiconductor chips.

The shortage of automotive semiconductor chips is a phenomenon affecting the global automotive industry, including Europe, Japan, and the United States. Ford in the U.S. is reportedly closing its German plant from the 18th until February 19th. Additionally, Honda in Japan announced it would reduce production by 2,200 sedans produced in North America and about 4,000 compact cars produced at its Mie Prefecture plant. Toyota Motor in Japan has decided to reduce production of the pickup truck 'Tundra' at its Texas plant in the U.S. Nissan also plans to cut its originally planned January production from about 15,000 units to over 5,000 units. Furthermore, Renault, General Motors (GM), and Fiat Chrysler Automobiles (FCA) are also reported to be affected by the semiconductor shortage.

The reason the global automotive industry has had to halt production lines one after another is due to the surge in semiconductor demand combined with the industry's just-in-time production system.

With the COVID-19 pandemic spreading remote work, demand for semiconductor chips surged across the IT industry, including cloud infrastructure, data centers, PCs, and mobile devices. Moreover, last year, as more automotive companies shifted to just-in-time production, not stockpiling parts has also contributed to production disruptions.

Duesmann, Audi CEO, explained, "Unexpectedly strong demand occurred in the third and fourth quarters of last year, and we were unable to respond in time."

The semiconductor industry is working hard to ramp up production lines to meet demand, but due to the nature of semiconductors, the lead time (the time from product manufacturing to completion) is long, making vehicle production disruptions inevitable.

Another burden for the automotive industry is competing with smartphone and home appliance companies for the increased semiconductor demand caused by the COVID-19 pandemic. Companies like Apple are willing to pay higher prices for semiconductors than automakers. Jeff Pu, a researcher at GF Securities, analyzed, "Electronics companies such as home appliances and smartphones are willing to pay premiums to secure semiconductors to sell their products on time in the market," adding, "On the other hand, the automotive industry is not like that, and especially due to the direct hit from COVID-19, there is a growing tendency not to stockpile inventory."