How will the microchip shortage impact the auto industry for years to come?

How will the microchip shortage impact the auto industry for years to come?

16 November 2021 | Kate Kozlowska | 4 min read

Several inevitable consequences have been triggered by the microchip shortage, most of which can't be solved in the short run. 

How will the microchip shortage affect the future of the auto industry?

Semiconductor shortage is an absolute nightmare for automobile manufacturers, and lessons learned will resonate throughout the automotive industry for years to come. The state of flux the industry is currently experiencing greatly influences these long-term effects as well. 

Vehicle manufacturers are increasingly adopting technology and software in-house to cope with the ongoing CASE (connected, autonomous, shared, and electric) transformation, so the sector is in a period of disruption.

Considering the chip shortage, automakers are increasingly forced to adapt to the current situation and tackle the future in a more efficient way.

For the moment, chipmakers are typically tier three or tier four suppliers to automakers, which means they take some time to adjust to changes affecting their demand.

Due to these factors, the automotive sector seeks to build a more connected supply chain ecosystem that can boost efficiency on several levels and mitigate future disruptions. In other words, original equipment manufacturers (OEMs) are regaining control as opposed to almost entirely depending on tier one suppliers - a challenge that will take years to overcome.

Prior to the pandemic, many auto companies had already begun strengthening internal software development in order to have a greater measure of control over the software that is incorporated into their products, as this is the determining factor for future profitability.

The move is impelled by the industry's desire to embrace the concept of software-defined vehicles in which features are defined or redefined via software updates, and hardware is driven by the software.

Combined with the lessons learned from the microchip crisis, this is driving automakers to improve their hardware and its requirements in a way that does not compromise software monetisation over a vehicle's lifetime.

The idea of original equipment manufacturers building their own chips is impractical, as their values are so low in comparison with those of the wider market. Many automakers will design their own microchips regardless, customising them to fit their needs. Tesla's microchip for its Full Self-Drive system is a great example of this. Furthermore, automakers may also begin to secure microchip manufacturing capacity.

Original equipment manufacturers will be able to secure microchip production capacity and have tighter control of manufacturing requirements if they are able to establish direct relationships with microchip makers (bypassing supplier layers). There is a good chance they will begin this new type of relationship with chipmakers with the most important chips. Since certain chips are so important, automakers will focus their efforts on gaining a competitive advantage in these.

To conclude, disruptive changes are rarely caused by one factor alone. Automakers will be forced to go even further with their plans to become tech companies after the microchip shortage.


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