QUESTION 1: What does the global shortage of semiconductor chips suggest about the future of supply chains in the auto industry?

QUESTION 2: How was Toyota able to minimize the downsides of the global chip shortage on its production? What can other companies learn from Toyota?

QUESTION 3: As the world moves away from traditional combustion engine vehicles and towards electric vehicles, the number of semiconductor chips required in each car will increase. Should automakers continue to outsource their chips or move to in-house production?

OPENING CASE creating strong demand for network equipment and the In early February 2021, despite the COVID-19 pandemic, chips that went into them. To compound matters, the Trump administration had General Motors announced strong fourth quarter earn- imposed trade sanctions against the Chinese telecom ings. Auto sales had recovered strongly from a pandemic- equipment giant, Huawei Technologies, barring it from induced slump since the early part of 2020. However, GM buying chips made in America or incorporated into also stated it would be reducing production of automo- American technology. Huawei had responded to the threat biles at several of its North American factories due to a of sanctions by hoarding chips to ensure its survival. growing shortage of semiconductor chips (a typical modern Fearing broader sanctions from the United States, other automobile contains over 50 microprocessors). GM said it Chinese electronics firms had followed suit and stockpiled expected its earnings in 2021 to be $1.5 billion to $2 billion chips. As a consequence. China sucked up chip production lower due to the global chip shortage. GM was hardly in 2020 and chip imports into China climbed to a record alone. A number of other automobile companies had $380 billion. made similar announcements. Ford said its first quarter Now the automobile industry has to find a solution to production in 2021 would be 20 percent lower due to the the problems caused by these supply chain disruptions. It chip shortage. Honda announced that it too had to adjust will not be easy. Existing factories are already running at production downward. Germany's Audi stated it would full capacity. It can take 18 months and billions of dollars to delay making some of its high-end vehicles and furlough bring a new factory online. In the short run, chip makers over 10,000 employees due to what it described as a have responded by asking automakers to give them much "massive shortfall" in semiconductor chips. In total, auto- longer lead times on chip orders, and by raising their makers predicted a decline of over $60 billion in sales in prices (particularly for expedited orders). For their part, the the first quarter of 2021 due to the global chip shortage. automakers are rethinking their supply chains. Volkswagen, The shortages of chips can be traced back to the pan- for example, had historically let its major component part demic's early days. When countries around the world went suppliers handle chip orders, but it is now considering into lockdown in the first half of 2020 , automakers scaled buying chips directly or reserving capacity with chip manuback current production and held back on preparations for facturers that it would then make available to component future automobile production. Component part suppliers part suppliers. More generally, automakers are accepting responded by cutting back on their own production, and in the fact that they will have to work more closely with chip turn, they reduced orders for the electronics that went into makers going forward and may have to stockpile chip so many component parts. The thinking at the time was inventory to ensure supply security. that demand would not rebound to its pre-pandemic level Interestingly, the world's largest automobile company, for several years-an assumption that turned out to be Toyota, seems to be ahead of the curve here. As the panwrong. demic unfolded in early 2020 , Toyota stockpiled chips to For years, the chip makers, many of whom were based help it through shortages. The company had also long in Southeast Asia, had supplied the auto market on a just- worked closely with its suppliers. The company is a large in-time basis. Lean global supply chains had long benefit- and stable customer for its suppliers, providing fairly relited automakers and their component part suppliers, who able production volume on a monthly basis, as well as a did not have to have working capital tied up in expensive production plan that extends three years into the future. inventory or build warehouses to store that inventory repeatedly communicated those plans throughout When demand from the automobile market slumped, chip the pandemic, which helped it to secure chip supplies. makers chose not to stockile supplies and wait for orders Like many of its rivals, Toyota saw its revenues and profits from automakeroble rebound in the second half 2020 , but unlike its global rivals, Toyota expected its revenues and profits to increase , they had their hands full satisfying surging again in 2021. demand from companies that were suddenly benefitting Sources: W. Boston, A. Fitch, M. Colias, and B. Foldy, "How Car Makers from the pandemic. These included makers of laptops, Collided with a Global Chip Shortage," The Wall Street Journal, computer servers, smartphones, and video game con- February 12, 2021; S. McLain and K. Narioka, "Toyota Profit Quickly soles, who saw orders soar as people switched to working Recovers Despite Chips Shortage," The Wall Street Journal, February from home, and instead of going out at night, stayed in and 10, 2021; D. Wu, S. Kim, and I. King. "Why the World Is Short of played video games or watched shows on Netflix. The Computer Chips, and Why It Matters," Bloomberg, February 17, 2021; rapid rollout of the superfast 5G wireless network was also With," Mint, January 20, 2021