Empty dealership lots. Long waiting lists for new vehicles. Higher prices for both new and used cars. The semiconductor chip shortage hit the auto industry hard, impacting manufacturers, dealers, and consumers alike:

  • Consulting firm Alix Partners has estimated that the shortage will cost the automotive industry $210 billion in lost revenue in 2021, $100 billion more than the firm’s initial estimates.
  • AutoForecast Solutions projects that 11.3 million vehicles will be cut from production plans before the crisis is resolved.
  • Additionally, some experts anticipate that shortages will last at least into 2023, with Cox Automotive estimating that it will take at least until 2025 for the wholesale car market to rebound to pre-pandemic, pre-chip shortage levels.

For their part, consumers are starting to shy away from new car purchases:

  • In April 2021, research showed that 42% of car shoppers were willing to pay the above-MSRP prices that have become common during the shortage. However, that number dropped to 35% in August.
  • Additionally, 48% of car shoppers said they were likely to put off a purchase, a number that grew from 37% in April.

Amidst all of this fallout, the question remains: Could this all have been avoided?

Could the semiconductor shortage have been prevented? Or, at the very least, could automakers have positioned themselves more effectively to mitigate the effects?

To answer those questions, let’s first look at the causes of the semiconductor chip shortage. As you may expect, some of them find their origin in the pandemic—but not all of them.

The Origins of the Semiconductor Shortage

Before we dive into the “why” behind the recent semiconductor shortage, it’s interesting to note that this isn’t the first time it’s happened.

Back in 2010, toward what we now know was the tail-end of the global financial crisis, several semiconductor plants closed their doors in anticipation of a double-dip recession. The economy rebounded faster than expected. (Sound familiar?) As a result, many manufacturers were left without semiconductor chips and other components. Apple was unable to fulfill orders for its (relatively new) iPhone, and car manufacturers like Nissan had to suspend operations.

In other words, the automotive industry is no stranger to semiconductor supply interruptions—nor disruptions involving other critical parts. However, the industry simply wasn’t prepared for the size and scope of the recent semiconductor shortage.

To be fair, the shortfall was the result of a perfect storm of overlapping incidents, including:

Geopolitical Tensions

As part of the trade war with China, the Trump administration put significant pressure on the global semiconductor supply chain.

In July 2018, 25% tariffs were imposed on imported semiconductor chips, which reduced the number of chips imported into the U.S. by about 50%. Although the intention may have been to replace supply from alternative sources, that simply didn’t happen. The administration also blacklisted China’s Semiconductor Manufacturing International Corporation, the country’s largest manufacturer, cutting off another source of chips for U.S. companies.

The overall results? Fewer chips available overall for U.S. companies.

In response to these policies, many Chinese firms began stockpiling chips, further tightening global supply.

Years of Underinvestment by Semiconductor Manufacturers

As the market tightened, it exposed a significant weakness in the supply chain: Many semiconductor manufacturers hadn’t made recent investments into their operations. Many of the older, simpler chips that auto manufacturers use have tight profit margins, leaving little incentive for manufacturers to upgrade equipment.

However, as a result, it wasn’t easy for them to ramp up production as demand shifted.

The Pandemic Effect

As you may have expected, the pandemic did play a role in the auto industry’s semiconductor shortage. At the start of the pandemic, automakers shut down their factories and delayed or canceled orders from suppliers, including semiconductor manufacturers. As the pandemic wore on, more people were searching for things to do from home. Demand for consumer appliances and electronics rose. Chip manufacturers diverted to supplying these manufacturers, some of whom were willing to offer higher prices for components.

As a result, when automakers resumed operations, they found themselves at the back of the production line. As a group, automakers only make up about 5% of semiconductor chip buyers. Without any significant buying influence, they simply had to wait.

Additionally, lead times for these chips can be significant. Large orders may take anywhere from three months to be fulfilled. Additionally, it can take as many as six months to go from order to installation in a car. All of this meant that solutions to the shortage wouldn’t come quickly for automakers.

A Slew of Natural Disasters

Natural disasters have been at the heart of several supply chain disruptions, and this one is no exception. However, what is notable is just how many natural disasters lined up to stymy the semiconductor manufacturing industry, including:

  • July 2020 – A fire at a Nittobo plant impacts global supplies of ABF substrate, a critical element for component manufacturing
  • October 2020 – A fire at the Asahi Kasei Microdevices (AKM) semiconductor factory in Japan shuts down operations
  • February 2021 – Extreme temperatures in Texas force closures of crucial semiconductor manufacturing plants
  • February 2021 – An earthquake halts production at Japanese chipmaker Renesas Electronics’ advanced chip plant in northeast Japan
  • March 2021 – A fire at another plant owned by Renesas Electronics damages 23 machines, as well as other critical aspects of the facility
  • June 2021 – A drought in Taiwan threatens semiconductor production at Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract manufacturer of the semiconductor chips

Ultimately, it all added up to a string of bad luck for semiconductor manufacturers, one that further tightened the market.

Supply Chain Management

Finally, some experts have pointed to the auto manufacturers themselves, questioning the way that they’ve managed their supply chains. For example, many suggest that it’s time for automakers to reexamine their inventory management strategies, as well as the way they work with suppliers.

We’ll save a larger discussion of this topic for the next section.

Could the Semiconductor Shortage Have Been Prevented—or the Effects Reduced?

Those are the questions that everyone from automakers to the Biden administration are trying to answer. Although the experts haven’t come to a full consensus yet, a couple of themes have emerged.

First, let’s discuss a few global and domestic solutions to reduce the possibility of future impact to U.S. companies.

Reducing Geopolitical Risk

Relations between the U.S. and China remain tense. Additionally, some believe that the future of Taiwan also remains uncertain. One suggestion from Foreign Affairs argued for a semiconductor research and development consortium between allied countries. By learning from each other, rather than competing, the magazine argued, such a consortium could strengthen these countries’ position.

Reshoring and Sourcing from Friendly Shores

Along those same lines, increasing domestic production of semiconductors would help U.S. manufacturers reduce risks arising from geopolitical issues. In 1990, the U.S. accounted for 37% of the global semiconductor chip production. That number dropped to 12% by 2020. Several manufacturers, including Intel, Taiwan Semiconductor, and Samsung, have announced plans for manufacturing facilities in the U.S.

Additionally, the EU has also announced plans to increase semiconductor manufacture. By 2030, it aims to deliver 20% of the world’s supply of semiconductors, pledging more than $190 billion to deliver on this promise. Should it succeed, EU semiconductor manufacturers would offer the U.S. a more politically stable supply.

Next, let’s talk about a few ways that the auto industry specifically is tackling this issue.


Although some experts doubt these strategies will pay off, some automakers have considered making their own chips. Tesla is paving the way for innovation in this field. By designing and manufacturing the microchip for its Full-Self Drive system, Tesla has implemented one way of insulating itself from supply chain interruptions.

Revised Inventory Management Practices

Some experts have blamed lean inventory and just-in-time strategies for hobbling auto manufacturers. Toyota, a long-time proponent of just-in-time strategies, changed their tune on this topic a few years ago, at least where semiconductors are concerned. After the Fukushima disaster in 2011, Toyota negotiated an agreement with suppliers to stockpile a backlog of chips. As a result, in the second quarter of 2021, it surpassed GM in North American sales for the first time since 1998.

Although Toyota did eventually run short on chips, this risk management strategy helped Toyota soften the blow from the semiconductor shortage, at least for a few months.

A Shift in Philosophy

Next, other experts suggest that automakers may need to rethink their identities. As cars increasingly rely on chips to power even the simplest functions of their vehicles, automakers have to acknowledge that they’re now competing for resources beyond their industry. They’re not simply trying to edge out other automakers but electronics manufacturers overall—or, really, any manufacturer who relies on semiconductor chips. That might require a shift in strategy.

In response to this cross-industry demand for semiconductor chips, some car manufacturers are examining how they can reduce their reliance on these components. Volkswagen specifically is examining whether they can use more modules and fewer chips, reducing their dependence on chip supplies.

Improve Effectiveness of Supply Chain Tracking, Planning, and Visibility

As we mentioned earlier, semiconductors have a significant lead time, one that can stretch to ~20+ weeks, even in times of normal supply. Managing those longer lead times requires different strategies, including fully mapping out supply chains, digging deeper into lower-tier suppliers, and creating longer-term forecasts. In other words, when manufacturers are relying on parts with long lead times, planning processes need to change, too.

A Deloitte study of global companies revealed that only 18% of chief procurement officers were tracking risk in their Tier 1 suppliers, and only 15% went beyond to their junior-tier suppliers. Numbers are similar in the automotive industry, with 40% of companies reporting that they have very little visibility into Tier 3 suppliers.

More Transparent & Timely Supplier Communication

The same goes for communications with suppliers. Despite the long lead time for semiconductor chips, many junior-tier suppliers only have visibility into a portion of manufacturers’ long-term forecasts. One wrong guess could leave a Tier 3 supplier short, which will ripple up quickly to Tier 1 suppliers and manufacturers.

Additionally, the speed of communications to junior-tier suppliers can be slow. In some operations it can take several weeks for updated forecasts to trickle down several tiers of the supply chain. Given the pace of global business today, it would be easy to miss an opportunity to act on a global event or a shift in demand.

In other words, more transparency and efficient communication could make for more consistent delivery from junior-tier suppliers. This, in turn, means a greater likelihood of on-time delivery by Tier 1 suppliers.

Stronger Supplier Relationships

Finally, it’s clear there may be some fall-out from this crisis, especially in terms of the relationship between automakers and semiconductor suppliers. Some automakers left chip manufacturers in the lurch when they canceled orders during the start of the pandemic. Additionally, some automakers have reported being frustrated with their semiconductor suppliers for not managing their end of the operation more effectively.

Obviously, fractured relationships will need to be repaired for this link of the supply chain to work effectively in the future.

Lessons Learned from the Shortage

The causes of the semiconductor shortage are complex, and there are no easy solutions. However, as many industries learned during the pandemic, reducing risk from significant global events requires a rethinking of supply chain strategy—all with the goal of creating resilient, flexible supply chains that are ready to adapt to the next disruption.

Looking for strategies to make your supply chain more resilient? We’d love to talk with you. Schedule a complimentary consultation with one of our experts, and we’ll take a holistic look at your supply chain—together.


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