More factories close as chip shortage continues

Global demand for chips remains much higher than supply, leading to a new series of production interruptions in car factories. A new balance should be achieved by Q4, reassures Taiwan.

Semiconductor manufacturers were already struggling to meet demand, but as some have been hit by the coronavirus delta variant, things could get worse in the next few months.

Various carmakers have announced reduced output:

• Toyota will reduce production by 40% in September, producing around 40,000 fewer cars for the European market.
• Ford is closing its Fiesta factory in Cologne for one week. Production of the F150 in the US will also be interrupted for one week.
• Audi is extending the summer break for most of the factory workers in Ingolstadt en Neckarsulm.
• Volkswagen has also extended the summer holidays for part of its workforce in Wolfsburg.
• Stellantis, Renault, Daimler, Volvo and BMW (including the VDL Nedcar factory) have also announced production issues due to the chip shortage.

How much longer?

According to research by Susquehanna Financial Group, it now takes more than 20 weeks for chip orders to be fulfilled, indicating the shortages are getting worse.

The chip shortage came about when two phenomena coincided at the height of the coronavirus pandemic in 2020: after a first bump in consumer demand for goods with chips built into them, demand rose as people sought to set up home offices and bought entertainment devices to keep themselves occupied. Companies that build those devices sent a wave of additional semiconductor orders to the supply chain which overwhelmed the chip foundries. Shortages ensued and were made worse when some production facilities needed to close down temporarily due to lockdown measures. Backlogs have started piling up.

The obvious reaction would be to build new semiconductor factories, but that's a process that can take up to two years. What's more, it is likely supply and demand will have established a new balance by that time, leading to an oversupply which could cause semiconductor prices to fall. This means factory expansion plans need to be considered carefully.

In the case of the automotive industry, there is an additional caveat: it can't use consumer-grade chips as those don't hold up to the demanding operating conditions car are subjected to. This limits the possibilities to shop elsewhere. For this reason, most carmakers are cautious in their predictions for the second half of 2021, even though all economic indicators are firmly green.

Taiwan reassures

Meanwhile, the Taiwan government has declared Taiwan is committed to doing its share to tackle the shortage, even though Taiwanese chip manufacturers are not the main suppliers for the car industry.

“Though the automotive chip industry chain is long and complex, with the full cooperation of our country's firms, the industry estimates that supply and demand for auto chip production by chip manufacturer should reach a balance in the fourth quarter of this year,” Economy Minister Wang Mei-hua told Reuters.

She added: "Taiwan will continue to work together to build a safe, trustworthy, and resilient supply chain, and deepen economic and trade relations to lay a solid foundation for economic recovery after the pandemic.”

The issue goes beyond the chip crunch, taking on a diplomatic importance as Taiwan wants to reassure its long-time partner and military ally that it will do it utmost at a time when China is increasing pressure on Taiwanese territorial integrity.

When announcing its half-year results, ALD said it was looking forward to an equally strong second half of the year in which it expected growth to be slightly hindered by production delays. Other leasing companies expressed similar concers.

Photo: Volkswagen's Wolfsburg factory (copyright: Shutterstock)