Supply of auto parts has not yet reached equilibrium, but demand may weaken first
The global process of automotive digitization and electrification continues to advance. Yet for the past two years it has stalled due to the automotive chip and lithium battery crisis. When can this material shortage end? So far, it does not seem like an easy task, mainly because the supply is far behind the increase in demand. Regional supply chain development may face different situations before the newly expanded production capacities are put into operation.
Anticipation of out-of-stock parts
To fully understand the dynamics of automotive chip supply, we need to start with the supply structure. To get started, let’s look at chip suppliers for mainstream automotive brands:
First, 80% is in the hands of embedded device manufacturers (IDMs), including Infineon, NXP, TI, Renesas, STMicroelectronics, etc. These IDMs have a long history of working with mainstream automotive brands. So, when the shortage occurred in 2021, IDM’s production capacity was first contested by automotive brands. At the end of 2021, a high percentage of them were tightly bound by contracts.
Second IDMs need support from contract chipmakers for rush orders. For parts where IDM production capacity is not sufficient, help will be sought from contract chipmakers such as TSMC, Vanguard International Semiconductor (VIS) and UMC. However, this still depends on the available capacity of each contractor, which naturally has its limits, especially since the main customers of the contractors are those in the consumer electronics sector.
Since 2021, it has been a showdown for production capacity between consumer and automotive chips. The war was fierce during the first quarters, but with the fluctuations in the overall economy, consumer demand has declined significantly recently. Automotive chips took advantage of the easing in uptime and hogged available capacity. However, key applications such as microcontrollers (MCUs) and insulated gate bipolar transistors (IGBTs) are still lagging behind.
In addition, the drip feed of new automotive chip production capacity is failing to catch up with demand. Including companies like Texas Instruments (TI) and European tier 1 supplier Bosch, new production capacities have been made available, but this may not solve the crisis in the short term. The other comes from the Chinese supply chain. The region is highly self-sufficient, as self-production of semiconductors is China’s established policy. However, this new capability will mainly be provided to Chinese brands.
Finally, the potential new supply in the future is worth looking forward to. This includes the establishment of factories by TSMC in the United States and Japan, as well as new production lines by UMC in Singapore and Japan. Additionally, GlobalFoundries (GF) has expanded production to Europe and Singapore. Intel and Samsung Electronics have also been active participants in the future automotive market, with Samsung working with Tesla to meet the latter’s chip demand.
Vehicle supply chain expected to reduce demand for 4Q22
It should be noted that not all automotive chips are in short supply. Examples include the display driver IC (DDI), audio IC, power management IC (PMIC), and diode, all of which could experience a slowdown in demand at the end of the third quarter of 2022 and in the fourth quarter of 2022. In addition, PCB materials such as copper clad laminates (CCL) are expected to be considered as long supply chain products.
As the consumer electronics market weakens, the supply chain is accelerating its deployments in the automotive field. However, supplies from short supply chains have seen little improvement, meaning car assembly is still hampered. The momentum for shipments to the auto sector would be down, likely because automakers are turning conservative.
Production and sales targets set by automakers are unlikely to materialize by the end of the year due to the abundance of black swans in the first three quarters. Now, automakers are more eager to be able to produce acceptable financial reports for the year. Inventory cost control and layoffs are the most common strategies.
The gap between long and short supply chains has been too big for automakers to cope with. At the start of the year, it was thought that there would be no shortage of chips, which later turned out to be overly optimistic, with the short supply chain playing a key role in their production. The issue has prompted Toyota and Tesla to announce they will temporarily stop accepting orders on certain car models, although automakers believe they should start pulling shipments again in early 2023.
However, for New Energy Vehicles (NEVs), there is more to worry about than just chip shortages. The supply of lithium batteries has been a problem. Lithium batteries, a key component of electric vehicles (EVs), account for around 30-40% of the total vehicle cost.
With global demand for electric vehicles growing rapidly, the expansion of supply has not been able to keep up. Currently, there are two main types of EV batteries: ternary and LFP. The former is mainly supplied by the big three in Korea – LGES, SK ON, Samsung SDI – and by Panasonic of Japan, and some Chinese manufacturers. As with LFPs, a high percentage is supplied by Chinese manufacturers such as CATL, BYD and Guoxuan.
The shortage of lithium batteries in 2022 could be more serious than the shortage of chips, because it will take time to create new production capacities. Market watchers believe that production will not only experience significant increases until 2024.
Strong demand from battery manufacturers has put severe pressure on upstream mineral supply. In 2022, the mineral that is attracting the most attention is lithium carbonate, used in both ternary and LFP batteries. Because mineral refining supply lags far behind demand for lithium battery cores, prices have soared, affecting downstream battery and car makers.
Supply reversal dynamics appear
The fight for chip production doesn’t seem to be over any time soon. The problem is, with such weak consumer applications, why do we still have to fight for automotive chips? In reality, the big IDMs are all waiting for production on the foundry side. For the foundries, they hope to maintain fairness because they don’t want to displease any customer. Thus, they distributed their potential automotive-grade production to each IDM.
Since most foundries are verified to only do commercial grade applications for much of their capacity, they are at the mercy of the ups and downs of the consumer market. This will lead to a very polarizing fourth quarter for the semiconductor industry.
In terms of semiconductor equipment, most industrial grade production can be upgraded to automotive grade. That’s why, during the automotive-grade shortage in 2021, industrial-grade production was the first to be sacrificed. By the time the start of 2022 arrived, even equipment manufacturers could not produce equipment due to the shortage of chips. It was only then that people realized how serious the problem was.
To address this shortage of industrial-grade chips, the industry has turned to new designs that use more advanced semiconductor manufacturing processes to avoid a conflict with automotive-grade chip production, which relies primarily on mature processes. However, with the impact of the macroeconomic environment, the semiconductor sector is also slowing its expansion, which may reduce the demand for industrial-grade chips.
Slowdown in demand for parts of the automotive market
It should be noted that the aforementioned interpretation is based on the fact that end-user demand for cars continues. As international black swan events swarm, talk of slowing demand has emerged in the auto market.
European market: Caught between the Russian-Ukrainian war and the energy crisis, some European automakers have publicly issued a warning about falling orders after the spike. In addition, the energy crisis has led some European governments to consider prioritizing citizens’ daily electricity consumption. Factories may have to close and car assembly may be affected.
Additionally, rising component costs have kept NEV prices high. Consumers are beginning to feel the benefits of buying a new car are diminishing. Add to that Germany’s decision to cut subsidies by fall 2023, and the fear is that the small, compact NEV market will collapse.
Chinese market: In the second half of 2022, the purchase tax on fuel vehicles in China will be halved. To offset weak first-half sales due to COVID lockdowns, fuel vehicles are pushing price discounts. Seeing a sharp decline in orders, some NEV manufacturers are imposing price discounts amid significant reductions in motorist orders. With component costs remaining high, the profit margin is squeezed.
China is the world’s largest NEV market and is expected to maintain high growth in 2022. But NEV purchase subsidies will end at the end of 2022 with no new subsidy policies in sight. And it has been speculated that in the future, taxes on NEV purchases will be required. This may be why car users are rushing to buy NEVs in China: the share of NEVs in overall car sales has risen from 20% to 35%.