The Chip Dip: Latest Global Impact of Supply Chain Constraints

Global light vehicle production is estimated to have
been up by 15% in the first quarter of 2021 and as we reach the end
of the second quarter, we expect growth of 50% against a weak
comparison in 2020. As the automotive industry recovers
from the pandemic it continues to be challenged by a series of
supply chain constraints.

As original equipment manufacturers (OEMs) and suppliers
continue to evaluate the resiliency of their supply chains and
inventories as well as adapting their schedules to reflect these,
IHS Markit analysts have been keeping abreast of developments.

In the first quarter we started to see major disruption as it
became clear that supply chains were out of sync and semiconductors
were not available to support higher levels of vehicle demand. The
semiconductor supplies had been moving to other industry sectors,
consumer electronics, over time, and vehicle demand had come back
strongly after the initial disruption of COVID-19 in the first and
second quarters of 2020. This strong demand was also creating an
imbalance as the semiconductor supply chain was not geared up to
support the level of automotive demand that was emerging.
This led to an estimated 1.4 million light vehicles not
being built globally in the first quarter.

Moving into the second quarter the levels of disruption
continued to weigh down on automotive supply chains including
semiconductors. The situation from the first quarter
already presented a challenge, and then we saw the effects of the
storms that hit Texas, spurring concerns over the ripple effect.
Shortly afterward, the Fukushima earthquake in Japan, along with
the fire at Renesas Naka 3 facility further dealt a blow to the
supply chains. All these additional shocks happened in the first
quarter, but the greatest impact was felt in the second.

In third quarter we expect continued disruption but not
to the scale seen in the first or second quarter. We
expect an improvement over the first or second quarter because the
situation is becoming better understood and great efforts are being
made to enhance visibility within a very complex supply chain. We
see evidence of this in some of the more relaxed announcements
coming from General Motors (GM) starting back operations earlier
than initially planned and Toyota’s ongoing commitment to its
planning. In Toyota’s case we know that they have been monitoring
supply chains for over 10 years since the Fukushima
earthquake/tsunami in 2011, while GM has been focused on improving
its understanding of the situation since January and we may now be
seeing some results. However, there are still mixed signals and it
is too early to sound the “all-clear”.

Other OEMs are implanting similar efforts and while this can
only provide limited support, we take this alongside restoration of
semiconductor capacity at Renesas in Japan, plus NXP and Infineon
in Texas to ease levels of disruption over what we have seen so far
this year. Note again that we are only expecting capacity to be
restored to prior levels and do not expect a build-back effect to
take place.

For the final quarter we are expecting the supply of
semiconductors to align to a ‘reasonable’ level of automotive
demand. We stress reasonable as automakers and tier-1
suppliers will not achieve a reasonable level if they communicate
exaggerated or overly ambitious levels of demand for
semiconductors. Without any major capacity gains, one of the best
ways to reduce the kind of disruption we see now would be to align
available capacity to realistic planning volumes.

We are not expecting a significant constraint to emerge from the
consumer electronics sector in the fourth quarter of 2021. This is
partly due to our understanding of the timelines within the supply
chain and partly also because some of the drivers in 2020 are
unlikely to be repeated quickly—the sharp shift to remote
working and the need to be connected, the spikes in demand as the
world recovered from the shock of the first wave of the pandemic,
and the launch of major gaming consoles from Sony and Microsoft,
including the launch of a new iPhone. Based on this, real recovery
efforts would only start in early 2022.

Semiconductors update

The fabs that were impacted by the storm in Texas and the fire
in Japan are back to their pre-crisis output levels. The recent
fire in the 300 mm cleanroom at Renesas’ Naka fabrication in Japan
impacted a small area of the fabrication but it damaged water
supply, air conditioning, and manufacturing equipment. As of June
25, Naka 3 is back to 100% of its pre-fire output level. Likewise,
NXP announced in April that its Austin fabs are back to 100%
pre-storm levels.

While the drought in Taiwan continues the rainfall in June was
about the historic average the month. This is not a sign that the
drought is past, but certainly a positive sign and has ease some of
the water restrictions for the area that would have affected fabs.
Hopefully this rainfall trend will continue as the next several
months are historically some of the wettest.

The other unknown issue is there have been some new COVID-19
outbreaks that have limited workforces at front-end and back-end
facilities If these are sporadic the impact should be minimal and
short term. However, the rise of new strains especially in regions
with limited vaccines continues to threaten the availability of
semiconductors due to workforce reductions.

The automotive suppliers of semiconductor-content impacted by
shortages are expected to improve in the third quarter with fourth
quarter now looking like the first opportunity for supply to keep
up with demand. However, IHS Markit estimates it will be
first quarter of 2022 before there will be enough capacity to keep
up with demand and to begin filling missed backlog.

In response to the disruptions of 2021 the semiconductor
suppliers are extending the fixed order window from 12 weeks
previously to a year or more now. Some minor adjustments
are allowed but orders are becoming noncancelable/nonreturnable,
which means even if the demand decreases the customer is
responsible for the value of the entire order. These conditions are
being applied to all semiconductors not just MCUs. The level of
confidence in the actual demand for semiconductors is one of the
reasons for these conditions, if the demand is real some see tight
demand continuing through 2022 until new front-end and back-end
capacity is in place. If the demand is exaggerated conditions could
relax sooner once the demand returns to more normal levels and the
systems are transparent enough for all to rationalize the
demand.

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Source: http://ihsmarkit.com/research-analysis/the-chip-dip-latest-global-impact-of-supply-chain-constraints.html