Why Are Automotive Chips Still In Short Supply In 2023?

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The automobile market has been badly affected by the chip shortage for the past three years,2020, 2021, and 2022. While many were hoping that there will be some improvements in 2023, the situation seems to be the same.

The shortage has forced many automakers to scale down on their production for the past two years. The fact that automotive chips are considered the heart of modern vehicles meant that it was difficult to build many cars that will meet the market needs.

As many countries began relaxing the COVID regulations, insiders started speculating that the shortage will finally come to an end by the end of 2023.

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There is still a shortage of auto chip in 2023

Well, it seems the pundits and insiders were wrong. Many automakers are still dealing with the chip shortage in 2023 just as they did in 2020. The only ray of hope is the situation seems to be improving, unlike in the past when things seemed to be so going from bad to worse.

According to the data from AutoForecast Solutions, it is predicted that in 2023, car makes will cut their production by a total of 3 million units. This seems to be a major improvement considering that in 2020 we witnessed car makers shelving up to 20 million units. In 2022, 4. 3 million cars were shelved from their respective lines. With this trend, there is hope that the chip shortage issue will finally be settled.

Causes of automotive chip shortage in 2023

Here are the main reasons why there is still chip shortage in 2023.

Tensions between China and the U.S

The political and economic tensions between the United States of America and China as been in existence for many years, and it is getting worse. In recent months the tensions have escalated to a higher level due to the political situation in Taiwan and this has had some damaging effects on the automotive chips industry.

In late 2022, the U.S. expanded its restrictions regarding the export of semiconductor chips. Such moves make it difficult for Chinese automakers to access semiconductor chips for vehicles.

Some companies have even been banned from using chips that have electronic components and software from the U.S. Similarly, some immigration rules have been enacted to bar green card holders from working in Chinese semiconductor manufacturers.

Moves by the U.S have hampered China’s capacity to expand the chip supply market. The tensions due to the trade war tensions have vastly affected the global supply chain of automotive chips.

COVID lockdowns in China

The short supply of automotive chips is 2023 can also be blamed on the COVID lockdowns in China. The zero-COVID policy that has been enforced in China for months forced ports and factories to be shut down so as to curb the spread of the virus. The policy has been in place since 2020 and is considered one of the key factors that have affected the semiconductor supply chain.

The good news is China relaxed some of these policies in late 2022 and this was a big relief to the semiconductor supply chain. Production and supply of automotive chips is expected to improve and even get back to normal levels.

The ongoing Russia-Ukraine war

The ongoing political situation between Ukraine and Russia has also affected the supply chain of automotive chips. Russia invaded Ukraine in 2022 and the crisis is still going into 2023.

How has this affected the chip supply market?

First, for years, Ukraine has been a major supplier of raw materials for semiconductor chips. It can be difficult to meet the supply needs for making the chips under the current situation. It has inhibited Ukraine’s full capacity to export the essential raw materials for the semiconductor chips.

The end of the war will make things better for the automotive chips supply chain. Otherwise, we should not have many high hopes for a better 2023.

Change in the demand for the automotive chips

This goes back to the laws of supply whereby an increase in demand will lead to a shortage of supply. This is the exact problem that seems to be affecting the automotive semiconductor supply chain in 2023.

A semiconductor market report published by MCkinsey revealed that the automotive industry accounts for up to 20% of the semiconductor chips demand. This means that there is a high demand of microprocessors by manufacturers.

Also, the fact the introduction of extra features on modern cars means that a single vehicle will use a high number of chips. The growing popularity of electric vehicles has skyrocketed the demand for semiconductor chips.

What do the semiconductor chip makers think of the situation?

Automotive chips industry executives are quite optimistic about the 2023. Many think that the market will take a positive trajectory in 2023. This is according to a semiconductor survey conducted by the global auditing firm KPMG in partnership with the Global Semiconductor Alliance (GSA). The survey was done in the last quarter of 2022 and it involved 151 semiconductor executives who gave their outlook about the industry.

The result of the survey gave a Confidence Index score of 56% for the coming year. Any value above 50 % is an indication of a positive trajectory. While this score seems to be lower than the scores we witnessed in the previous years, it is still a sign that we should have some hopes for the year 2023.

Automotive will be the main revenue source for semiconductor chips

According to the same survey, it is predicted that the automotive chips will be the main source of revenue for the chip industry from 2023 going forward up to 2030. KPMG predicts that the revenue from automotive chips will surpass $200 billion by the mid 2030 and will blow past $250 billion by 2050

Wireless communication IOT and Cloud computing ranked fairly well in the survey. From the survey, you can predict where chip manufacturers and suppliers will be putting their efforts on.

Also, most industry leaders do not thinks that the ongoing feud between Russia and Ukraine will affect the chip industry. From the survey, only 23% of the semiconductor executives think the ongoing war will have a damaging impact on the supply chain.

A mixed 2023 outlook for the automotive chips

From a general perspective, we still have a shortage of automotive chips in the first quarter of 2023. On the other hand, semiconductor chip makers are predicting a positive year. All the signals point toward the direction of a mixed outlook.

Up to the last quarter of 2022, major car makers such as Mercedes, BMW, and Volvo have reported minimal semiconductor supply issues. Others such as Nissan, Volkswagen, and Hyundai have reported that the supply chain has been improving over the recent months. This could be an indication that the shortage will be coming to an end very soon.

However, big players in the automotive industry such as Honda, Toyota and General Motors still decry of the automotive chip supply issues. In fact, General Motors has predicted that the issue could stretch deep into 2023.

Also, from these random reports, it seems that some car manufacturers seem to be more affected than others. This is seen as the main possible cause of a mixed 2023 for the chip market.

Change is inevitable

Different automakers have been making necessary adjustments in response to the automotive chip shortage. If you have been keen on the data from different car brands, you must have noticed some of these changes.

One of the most notable changes is some car manufacturers have wiped out specific models from their inventories. Others have limited specific features on some car models.

For example, Mercedes-Benz removed a number of premium features from some of its car models. These features include wireless charging and super premium audio quality. General Motors also removed the assisted-driving feature-Super Cruise on a few of its SUVs and trucks.

While there could be other possible causes for such changes, semiconductor car chip shortage is one of them.

When will the automotive chip shortage end?

At this point, it is clear that the chip shortage will persist into the last quarter of 2023, even when insiders are predicting a positive outlook.

On the other hand, indications of mixed results could also be an indication of the chip shortage could be near.

So, when should we expect the automotive chip supply chain to go back to normal?

Well, most people believe that the shortage could end by the end of 2023 or early 2024. Al indications point towards improved lead times and fast deliveries from chip manufacturers and suppliers.

Reports coming from chip manufacturers indicate that there have been significant improvements when regarding the production of chips. Some manufacturers have reported that they have been adding their production capacities since the last quarter of 2022. This means that by the end everything will go back to normal by the end of 2023.

Also, as the factors affecting the chip shortage in 2023 keep improving, we should be optimistic about what will happen in 2024.