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Much in the news the past weeks has been the chip shortage and its influence on automobile producers. The three articles under Files/assignments are just a few of those written. (1) Why do you suppose the system had so few inventories? (2) Why do prices allocate the chips to the users most in need?Tuesday 26 January 2021 FINANCIAL TIMES COMPANIES & MARK Global chip shortage bring production lines to a grindi Fiat Chrysler among carmakers to idle plants as tech sector soaks up s KANA INAGAKI - TOKYO DAVID KEOHAND - PARIS YUAN YANG - BEIJING JOE MILLER - FRANKFURT China's car market staged a dazzling recovery in the second half of last year, but it did so at a heavy price. The rebound has left companies including Volkswagen, General Motors and Honda facing a microchip shortage as a lockdown-driven boom in games consoles, laptops and televisions sends demand for semiconductors soaring and threatens to overwhelm chipmakers. Flat Chrysler is one of more than a dozen carmakers forced to idle plants this year as contract chipmakers in Tai- wan and China were caught off guard by the multipronged surge in demand. With workers having to be fur- loughed, car executives are seeking gov- ernment help in a bid to see if the supply of chips - which do everything from controlling power steering to anti-lock brakes - can be accelerated. "I am here to protect the fact that my 428 company is treated fairly," Carlos Tavares, chief executive of Stellantis, the newly merged Fiat Chrysler and PSA, told the Financial Times. "I will look for all possible solutions. If I need to I will fight back" to ensure chip con- tracts are met, he added. As the might of the carmakers con- fronts the power of consumer electronic companies, the crisis is also putting the motor industry's ever-increasing reli-Given that just 10 per cent of semicon- Estimated number of vehicles affected (OOO) ductor fabrication plants are used for automotive parts, carmakers do not 100 wield the same negotiating clout as con- At risk Recoverable sumer electronics groups. With no immediate fix available, the shortage is expected to last at least six months. 60 The production of more than 280,000 vehicles has already been put on ice, according to data provider AutoFore- cast Solution. IHS Markit forecasts as many as 500,000 vehicles could ulti- 20 mately be affected. While it has left the car industry on the back foot, it also comes at a period of North America Europe China Rest of Asia upheaval for chipmakers. Intel, which Sources: AutoForecast Solutions: IDC: Refinite this month installed a new chief execu- tive, is trying to regain the crown as leader in advanced chipmaking that it Carmakers such TSMC said this month that it would ceded to Taiwan's TSMC as General make the issue a priority. Last week, TSMC, meanwhile, is grappling with Motors are Peter Altmaier, Germany's economy the fallout from US sanctions against trying to ensure minister, wrote to his Taiwanese coun- Chinese telecoms group Huawei and that the chips terpart Wang Mei-hua, urging her gov- chipmaker Semiconductor Manufac they have are ernment to intervene. In a letter seen by turing International Corporation. used in their the Financial Times, Mr Altmaier . "The sanctions meant some clients most important appealed for belp in convincing TSMC to redirected their orders from SMIC to and profitable prioritise German carmakers, whose other places, such as TSMC," said a vehicles, such as recovery, he argued, was of importance China-based MCU chip supplier. "Inside pick-up trucks to the entire global economy. the industry, we are all pretty panicked Meanwhile, Netherlands-based chip- because the scope of the chip shortage is maker NXP and Japan's Renesas Elec- too big, and affects too many types. In tronics said they are seeking to increase the short term we can't see any way of prices in the wake of the shortage and as resolving it." raw material costs climb. Swiss rival Although chipmakers have faced STMicroelectronics is weighing a similar capacity constraints before, industry move, according to a person familiar with analysts say this crunch is made worse the matter. STMicroelectronics declined because the groups have little incentive to comment. to invest in extra capacity for the lower- Not every carmaker has been afflicted margin chips used in laptops and TVs, in the same way. Toyota has escaped rel- which have been in high demand during atively lightly after the Tohoku earth- lockdowns. quake and tsunami in 2011 prompted it Instead, meeting demand for higher- to diversify its supply chain and hold margin chips critical for 5G networks, more inventory. data centres and the new gaming plat- Hyundai Motor, the fifth biggest car- forms launched by Sony and Microsoft maker, has avoided crippling shortages late last year is far more attractive. because it did not cancel any chip orders "Everything is run so tightly in semi- when the pandemic forced factories to conductor fabrications plants that you shut in early 2020. always get this issue when there is a But most keep limited inventory, rely- demand surge especially after a down- ing instead on "just in time" delivery of turn," said Richard Dixon, senior princi- components to preserve cash. The pal analyst at IHS Markit. number of intermediaries in the supply As carmakers try to ensure that the chain also varies, with some relying on chips they do have are used in their most their parts makers to secure chips, while important and profitable vehicles, such others prefer to negotiate directly. as pick-up trucks, chipmakers are vow- Markus Duesmann, the boss of VW'sReduced supply; the outbreak of Covid-19 600 60 500 40 400 20 300 200 01 2019 2020 04 2019 20 21 Includes desktops, notebooks, and workstations "tier four" supplier for its semiconduc "Inside pliers, such as Continental, to develop tors, and there was "a very long chain closer relationships with chipmakers. with different supply levels on the com- the chip At the same time, possible entrants to ponents that we are short of". industry, the car market, such as iPhone maker If the crisis has exposed the perils of Apple, may seek to leverage their exist- forecasting demand during the Covid-19 we are all ing negotiating power in chips to gain an crisis, it also raises troubling questions advantage, according to Mr Mccabe. for a car industry whose fortunes are pretty There is also pressure building in expected to be ever more dependent on panicked China for semiconductor companies to chips as electric vehicles and autono- because the produce their chips domestically after a mous driving become more widespread. shortage that began last month is Although they only make up 3 per scope of the threatening strong sales of luxury cars cent of global car sales, the semiconduc shortage is and electricvehicles at home. tor content of electric vehicles is roughly "This episode of chip shortages has three times more valuable than that of a too big' once again shown how urgent and nec- petrol car, according to IHS Markit. essary it is to have autonomous and con- The changing nature of the technol- trollable supply chains", said Chen Shi- ogy in cars, say analysts, is likely to her hua, a senior official at the China Associ- ald profound change in the relations ation of Automobile Manufacturers. between car companies and chipmak- The squeeze has not so far led to any ers. It is also expected to force semicon- shortages in the supply of laptops and ductor groups to rethink how they out- TVs, which rely on the IC chips (DDI) source parts of their manufacturing to used to power electronics displays. But suppliers in Asia. with plenty of countries facing pro- "Once we get out of Covid, the real dis- longed lockdowns or restrictions, ana- ruption we are going to see over the next lysts warn it may yet happen. couple of decades is how electrification As more cracks emerge in chip supply and autonomy takes shape," said Joseph chains, carmakers appear to have little Mccabe, the chief executive of Auto- option but to wait their turn. Forecast Solutions. "After semiconduc "It is a question of fairness and equal- tors, the next one is going to be poten- ity. Everybody will get their share," said tially when we run out of rare earth Ashwant Gupta, chief operating officer materials to make batteries. There is at Nissan, which has been forced to cut always that next thing that they've got production of Note, its compact car, in to keep their eye on." Japan. Some carmakers and automotive chip "Everybody is adjusting their produc- specialists may consider taking more tions but we will come out of it soon." manufacturing in-house. In an effort to Additional reporting by Qianer Liu, Song avoid a repeat of the crisis, VW said it Jung-a, Edward White, Joe Kathrin Hille was considering bypassing its large sup- and Leo Lewis.There Is No Quick Auto-Chip F 10 FEB 2021 Overreliance on TSMC and soaring cost of old gear limits capacity expansion needed to fight The production shortage plagu- Share of automobile that improving production for auto controller units used ing the market for automotive microcontroller market chips is a "top priority." But the automobiles, estimate chips is a combination of new and harsh reality is that chips for cars srud of IHS Markit. old problems, none of which can 10 20 30% have to compete for manufacture Other parts of the be easily solved. Renesas ing space with other products that market rely on older Ford Motor last week was the generate a much higher return. ing processes and eq latest auto maker to show the fall- out. The company said Thursday NXP Nvidia, a major TSMC customer, economically viable d sells some of its latest gaming pro- low prices. Mr. Amsr that it is cutting production by up cessors for several hundred dollars many car chips are st to 20% in the first quarter due to Infineon-Cypress* apiece, whereas many of the mi- 200-millimeter wafer its inability to procure enough crocontrollers used in the world's phased out of the m chips. General Motors said a day Texas Instruments automobiles can fetch a dollar or chip-making processe earlier that it planned to trim pro- less. Even cheap chips can have ex- decade ago. duction at North American facto- Microchip pensive consequences, though. Ste- As such, the neces ies due to the shortage. Volks- phen Sanghi, chief executive of hard to come by, and wagen sounded an early warning auto chip supplier Microchip old gear on the secor In December about the issue, STMicroelectronics Technology, noted in his own call "has gone through th which is affecting auto makers last week that "a $1 part can pre- cording to Robert M across the board that need chips *Merger finalized April of 2020 vent a $40,000 car from shipping." conductor Advisors. to control everything from info- Source: IHS Markit Chip fabrication plants gener- The shortage will tainment systems to power man- ally take more than two years to solve itself, but Mr. agement to systems monitoring. eration of iPhones and artificial set up and the soaring cost of dicts the situation w The problem stems from actions intelligence chips for data centers. building and equipping them has improve until the thi both recent and distant. A sudden Industry giant Taiwan Semicon- led more semiconductor compa- this year or later. Ov drop-off in sales caused auto man- ductor Manufacturing, or TSMC, nies to outsource more of their term, the shortage m ufacturers to cut component or- said in its earnings call last month production needs. Renesas, NXP some chip companies ders early in the pandemic. Then that the auto market accounted for and Infineon-Cypress, which to- their outsourcing pra demand rebounded at an unfortu- 3% of its revenue in the fourth gether account for nearly 80% of now, though, car com nate time as chip manufacturers quarter compared with 51% for the automotive chip market, all need to make do with were operating at capacity to pro- smartphones and 31% for high-per- use TSMC for some of their manu- can get. Semiconduct duce components for hot, high- formance computing chips. facturing. The Taiwanese firm now turing doesn't have price items such as the latest gen- The firm said on the same call produces about 70% of the micro- gears.Renesas has been asking Automobiles clients for detailed updates to forecasts, reminding Chip shortage them of long lead times blamed on The crisis started last year as busi- nesses closed to stop the spread of coro- carmakers' navirus and carmakers cut production and chip orders. Markets such as China and the US recovered faster than forecasting expected but when carmakers tried to 15 MARCH 2021 increase output in response, they found chips in short supply because of an PETER CAMPBELL - LONDON explosion in demand for consumer KANA INAGAKI - TOKYO CLAIRE BUSHEY - CHICAGO gadgets, computers and phones during the pandemic. The car industry needs to improve its When carmakers initially cut their forecasting if it is to avoid another chip orders sharply in April and May, Rene- shortage, according to a senior execu- sas asked clients to provide it with long- tive at Continental, one of the world's er-term forecasts, Shibata told the FT. largest car parts makers In some cases, it signed contracts where clients guaranteed to buy 60 per Wolfgang Schafer, chief financial officer cent of the ordered amount, regardless at the German components group, said of changes in demand for cars. the current supply crisis, which has "We were holding longer-term discus- crippled the industry, was caused partly sions and that paid off," Shibata said, by unreliable estimates from carmakers adding that he still has regular calls with themselves, clients to track supply needs. Groups from Volkswagen to General So far, Renesas, one of the world's Motors have been forced to cut produc- largest producers of automotive chips, tion because of a global chip shortage has been able to keep supplying clients that is not expected to recede until the without any major disruption but the second half of the year. situation is tighter than ever. Shibata GM said last week that it would idle its said some of the shortage has been plant in Lansing, Michigan, until at least caused by panicked carmakers putting the end of the month because of the in "excessive orders" towards the end of shortage, adding to sites that are offline the year to increase inventory levels, or have planned downtime in Kansas, The crisis has forced carmakers to pri- Canada, Mexico and Brazil. oritise production of their highest-mar- "Part of the problem was the auto gin vehicles during the period. industry was not reliable in forecasting GM said last week that it "continues to over the last three years . . . They leverage every available semiconductor always ask a lot and then always order to build and ship our most popular and less," Schifer told the Financial Times. in-demand products". In a separate interview, Hidetoshi Shi- bata, chief executive of Japanese chip- maker Renesas Electronics, said that, as of last spring, the company had been asking automotive clients for detailed updates to forecasts, reminding them of the long lead times for production