Michigan Information & Research Service Inc.
Michigan Information & Research Service Inc.

No Quick Fix To Automobile Microchip Shortage

11/23/22 08:09 AM By Team MIRS

 (Source: MIRS.news, Published 11/22/2022) When you want a new cell phone, you can easily make a run to the local Verizon, T-Mobile or AT&T and pick one up at a minute’s notice. The same cannot be said for someone who wants to buy a new car.


But why, when the world is on the tail end of the COVID-19 pandemic and the supply chain issues that disrupted industries on a global level have lessened, are there still extended wait times for new cars and certain car repairs?


Cell phones require only a couple microchips to make a call, but cars need thousands to keep rolling down the road, said Kristin Dziczek, policy advisor for the Federal Reserve Bank of Chicago, on “Michigan’s Big Show with Michael Patrick Shiels."


Prior to her role at the Fed in Chicago, Dziczek was the senior vice president of research at the Center for Automotive Research in Ann Arbor.


“The people who are still in the market for a new car are buying vehicles at the top trim levels,” Dzicezk said. “The most tricked-out vehicles that have all the features.


“And, you know, that’s a demand issue. That people want to have advanced safety. They want to have a better fuel economy. They want to have all these convenience features that are enabled by chips,” she said.


And that’s only one contributor to the semiconductor (microchip) shortage that continues to plague the auto industry and car buyers alike.


In the first few months of the pandemic, amid the global lockdowns and business closures, the auto industry had a déjà vu moment and, fearing another industry collapse like the crisis of 2008-2010, it aggressively curtailed microchip ordering, Dziczek told a MIRS reporter after the show.


But the collapse never came.


“It was a much more resilient consumer and much more resilient market, so they pulled back too hard,” Dziczek said. 


At the same time, semiconductor production was reallocated because of increased demand from a different sector: consumer electronics.


“During the early part of the pandemic…every kid needed a Chromebook, and everyone had bought new consumer electronics to hunker down,” she said. 


Microchip suppliers met the demand by routing their fabrication and distribution capacity in this new direction – away from the auto industry.


Along the way, trust was lost, and turning that boat (or car) around takes time, Dziczek said.


“Now, they (the auto industry) have to go back and build some relationships and greater transparency in their chip supply chain,” she said.


“There are some quotes this week from Jim Farley from Ford saying, basically, ‘We screwed up. And now we’re learning what we need to do to fix that,’” Dziczek said.


During the Nov. 17 annual Semiconductor Industry Association dinner, Farley, the CEO for Ford Motor Company, said to the audience, “We need to understand your technology better. And we need supply chain people from your companies and our companies to get it right,” as reported in the media.


Dziczek wrote in the October 2022 Chicago Fed Letter that additional factors that have elongated and exacerbated the chip shortage include geopolitical tensions, such as Russia’s invasion of Ukraine and the increasing tension between China and Taiwan, environmental disasters and the continued lack of workers.


And if all that isn't enough, there’s a battle between producing analog or “mature” chips or the high-end, cutting-edge ones. 


Think of an iPhone. When an iPhone hits the market, it’s sexy, everyone wants one and it’s expensive. However, in a few years, that phone will be half the price, half the speed and have half the bells, whistles and camera quality of the newest iPhone because it has the old or legacy chips.


In internal combustion engine vehicles, around 90% of the semiconductors installed are mature, Dziczek said. They move the seats. They move the windows up and down. And while legacy chips make a cell phone obsolete, they only serve to make automobiles more durable and long-lasting. They’re tried and true, so to speak.


“I always joke that I don’t leave my iPhone in the driveway when a storm is coming, but I leave my car out there,” Dziczek said. “My iPhone is probably going to last three years, and my car is going to last 15 or 20.”


Mature chips are “battle-hardened,” “safety critical” and “super durable,” which is important in the auto industry, and “right now, we’re heavily dependent on analog chips,” Dziczek said. 


However, people pay “top dollar for the cutting-edge chip,” whereas “mature technology is a low-piece price,” she continued, which makes expanding and building new plants to make mature chips not attractive to investors. 


That’s where government help comes in. 


For the U.S., the help came only recently in the form of the CHIPS and Science Act (H.R. 4346). The CHIPS Act allocated $52 billion in subsidies for semiconductor manufacturing. And, recognizing the importance of continued fabrication of mature semiconductors, the Act specifically earmarked $2 billon for same.


From here on out, the automobile industry needs to change how they do things and focus on solutions that incorporate the lessons learned during the pandemic, Dziczek said.


“You know, it goes to that old adage about when’s the best time to plant a tree? 20 years ago. The second-best time is now,” she said.


The automobile industry is working toward implementation of several new strategies, Dziczek said, which include streamlining the multitude variants of chips down to a smaller number. Also multiple supply sources need to be pre-qualified so if one goes down due to a physical or health emergency, they can quickly switch to another supplier.


Dzicezk projected the chip crisis will continue into 2024, but said that a pivot toward a different type of vehicle, away from internal combustion engines, bodes well for the industry’s future.


“The automobile is undergoing a tremendous transformation as we move to greater electrification, hybrids and plugins and battery electric, but also on the software side, we’re moving to a vehicle that is what’s called a software defined vehicle that requires different types of chips,” Dzicezk said.


And while software-defined vehicles require fewer chips, they’re the sexy, advanced chips, and that’s where the money’s at.