The chip shortage bringing car factories to a standstill

LaToya Harding
·Contributor
·6 min read
US President Joe Biden holds a semiconductor chip as he speaks prior to signing an executive order, aimed at addressing a global semiconductor chip shortage, on 24 February. Photo: Jonathan Ernst /Reuters
US President Joe Biden holds a semiconductor chip as he speaks prior to signing an executive order, aimed at addressing a global semiconductor chip shortage, on 24 February. Photo: Jonathan Ernst /Reuters

BMW-owned Mini has revealed it is the latest UK car manufacturer forced to temporarily shut down due to a global computer chip shortage.

The plant will halt production on Friday, over the bank holiday weekend, and on Tuesday and Wednesday next week as it waits for more supplies.

The Mini plant, and a BMW metal-stamping plant in Swindon, employs around 4,500 members of staff. It makes both the three-door and five-door version of the brand’s flagship car, and the electric version launched in July last year.

The carmaker joins a string of automotive companies that have been forced to stop producing in recent months.

What is the chip shortage?

The semiconductor industry makes computer chips and it has failed to keep up with rising demand after it bounced back faster than expected during the coronavirus pandemic.

A rapid change in remote working across the globe caused higher sales of personal computers, while economists have said that consumers with more savings have splashed out on things such as TVs, new phones, and computer game consoles.

The global chip shortage has put pressure on a number of carmakers who are competing directly with tech companies and the consumer electronics sector for supply.

At the beginning of the pandemic, many car manufacturers cancelled orders due to fear of a long downturn in sales. However, as sales have started to recover they have now found themselves at the back of the queue for these microchips.

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Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, said on Thursday: “While the COVID situation is improving in the UK and in some major export markets, manufacturers are still struggling to manage residual issues, most notably the global semiconductor shortage.

Why are they key car components?

The chips are the “brain” of every electronic device.

In automobiles they are behind everything – from connectivity platforms to mapping applications. They control car brakes, doors and windscreen wipers, and advanced driver warning systems.

In more modern cars an even higher number of onboard computers are required due to the need to control things like in-car entertainment systems, air-conditioning and driver assistance technology.

Computer chips are also vital for the battery management systems in electric cars.

Which car manufacturers are affected?

The entire global car industry buys approximately $37bn (£26.5bn) worth of computer chips.

Jaguar Land Rover (JLR), the UK’s largest car manufacturer, was plunged into fresh crisis last week as the shortage caused it to temporarily shut down production at two of its main plants.

The company, which is owned by India’s Tata Motors (TTM), said it would have a “limited period of non-production” at its plants in Castle Bromwich in the West Midlands and Halewood on Merseyside starting on 26 April.

The shutdown is expected to last at least a week, although JLR will continue to monitor its chip supply before committing to a reopening date.

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Earlier this month, Nissan (7201.T) announced that it would furlough around 10% or 800 employees at its UK plant in Sunderland amid the supply chain issues.

The Japanese carmaker has asked affected workers to remain on furlough until the chip shortage lets up and production can be increased.

The company also announced it is planning to halt production at some of its factories in Japan from next month.

Other carmakers have made similar moves. Last month, US car company Ford (F) announced that it will cut car production due to the global chip shortage and said profits could be hit by $1bn.

Renault (RNO.PA) and Honda (HMC) also flagged similar plans, with the latter previously pausing production at its Swindon plant. General Motors (GM) warned that it could face a $2bn profit hit.

What other industries are affected?

The computer chips are used by a range of computer companies such as Microsoft (MSFT) and Sony (SONY), the makers of the Xbox and PlayStation games consoles, as well manufacturers like Samsung (005930.KS) which makes phones, TVs and refrigerators.

Samsung’s co-chief executive, Koh Dong-jin, who also heads its mobile business unit, said last month that there is a “serious imbalance” in the pecking order of who is getting the limited supplies of chips.

Apple (AAPL), the world biggest buyer of semiconductors, was forced to delay its launch of the iPhone 12 by two months last year due to the shortage. Apple spends around $58bn on computer chips every year.

The shortage has also affected cryptocurrency miners who need computer chips to solve puzzles that earn them Bitcoin (BTC-USD) and other digital assets.

How long is it expected to last?

The shortage is expected to last for some time as it can take up to two years to get semiconductor production factories up and running. Chips are also not easy to make, with advanced semiconductors taking up to six months to produce.

The world's largest chipmaker, Taiwan Semiconductor Manufacturing (TSM) dampened any hopes of the issues letting up soon by saying that the shortage could continue into 2022.

The company said that it plans to invest $100bn over the next three years to increase capacity at its plants.

READ MORE: What the chip shortage means for the US economy

It came just days after Intel Corporation (INTC) announced a $20bn plan to expand its capacity.

Meanwhile, the boss of networking company Cisco (CSCO) said the shortage of computer chips is set to last for most of this year.

"We think we've got another six months to get through the short term. The providers are building out more capacity. And that'll get better and better over the next 12 to 18 months,” Chuck Robbins said.

What does it mean for prices?

The shortage could mean a price hike for consumers. Some manufacturers have already raised their prices for the second time in less than a year, while others are in the process of increasing them.

According to Expense Reduction Analysts an estimated 20% increase in commodity prices has fed through in the first quarter of this year.

The shortage has also already caused a fall in the share prices of ETFs focused on chips, as well as artificial intelligence-focused firms.

It comes as president Joe Biden has linked the chip shortage in the US to his $2.3tn infrastructure spending plan, saying that the country needs to become the leader in semiconductor manufacturing. 

The US used to produce some 37% of the world's computer chips, however outsourcing to Asia has dropped that amount to just 12%.

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