What the Microchip Shortage Has Taught Us About Supplier Risk Management in the Auto Industry
As the COVID-19 pandemic escalated, demand for personal electronics skyrocketed as well. People were stuck working from home, and in many cases, their only connection to friends and family was through devices like smartphones and laptops. This led to an acute shortage of semiconductors and computer chips, the immediate impact was felt in the technology industry.
But evidence suggests that the shortage may be a long-term challenge. It will also have far-reaching implications beyond the technology industry.
The shortage is crippling automakers. Microchips are essential components for vehicles' onboard computers, as they control features like speedometers and antilock brake systems. According to Fortune, Ford is predicting a $2.5 billion reduction in operating profit because of the shortage.
But the chip shortage has provided companies with important revelations about their supplier risk management strategies. Now, manufacturing organizations of all stripes are searching for solutions to their supply shortages and a better path forward for their supplier networks. There are also lessons to be learned from companies that are already forecasting an end to their supply challenges thanks to their innovative supplier networks.
Intel Expands Its Advanced Chip Manufacturing Capacity to Address Shortages
Among other industry leaders, Intel has predicted that the chip shortage will outlast the pandemic and continue to impact any industry that depends on semiconductor technology. It will impact industries like auto and computer manufacturing, which will be felt by both businesses and consumers as demand for these products remains steady.
According to Reuters, Intel CEO Pat Gelsinger said, "While the industry has taken steps to address near-term constraints it could still take a couple of years for the ecosystem to address shortages of foundry capacity, substrates and components."
But Intel is already taking steps to ramp up its chip manufacturing capacity and address the shortage. According to the Reuters article, which is dated May 31st, 2021, Intel planned to start producing chips within six to nine months to address shortages specifically at U.S. car manufacturing plants.
Intel will achieve this goal by expanding its manufacturing capacity. It will build two new plants in Arizona to ramp up production, and it will open its plants to outside customers.
"We plan to expand to other locations in the U.S. and Europe, ensuring a sustainable and secure semiconductor supply chain for the world," said Gelsinger.
Although this expansion represents a significant investment (about $20 billion), it could pay dividends for the manufacturer down the road. Intel's investment represents a direct challenge to other chip manufacturers and will likely spur competition to gain market share. Intel is leading in this sector by proving once again that investing in capacity during times of struggle can help industries recover faster.
Qualcomm Weathers Supply Constraints Thanks to Range of Suppliers
Although the global chip shortage has affected vehicle production, some companies that operate adjacent to the auto industry have fared better than others thanks to their diverse supply networks. Qualcomm, which produces mobile connectivity and autonomous driving systems for cars, is already forecasting an easing of their chip shortage thanks to robust supplier management.
According to Axios, larger companies like Qualcomm are adjusting to supply shortages more effectively than smaller companies. This is due, in part, to the size and scale of the organization, but it is also because Qualcomm gets its chips from more than one supplier. This isn't the case for some of the company's competitors.
"We now have line of sight to material improvements for us toward the end of the calendar year," said Qualcomm president and incoming CEO Cristiano.
Diversifying the organization's supplier network is one of the bedrock strategies for weathering supply constraints. By obtaining supply from multiple sources, organizations can scale up their procurement from other suppliers if their main suppliers suffer disruptions.
However, this strategy is often challenging in the technology industry, and it is especially challenging for companies that depend on a steady supply of microchips and semiconductors. Intel, Samsung, and TSMC (Taiwan) dominate the sector, and most semiconductors come from North America and the Asia-Pacific region. This makes disruptions to those supply chains problematic to most of the organizations that depend on these suppliers.
Still, with Qualcomm as an example, auto companies and others that supplement the industry can now make a case for searching for alternative suppliers to make their supply chains more flexible and reliable.