Source: CLEPA, 2021-02-17
The sheer dimension of the semiconductor shortage and the complexity of solving both short and long term issues requires rethinking of supply chain options by both industry and policy makers. It also signals how 2021 may well become a year of great volatility for manufacturing industries.
Many elements are coming together in the current semiconductor shortage in the automotive industry: from the fall-out of the COVID-19 crisis and the unpredictability of crisis recovery, to increased automotive demand for chips due to assisted-driving functions and electrification, to geopolitical and natural disaster ‘de-risking’, to competing demand from other sectors.
In the first wave of the pandemic, the automotive industry came to an almost complete standstill and had to dramatically adjust production volumes to fence off costs, with little to go on as regards timing and speed of the recovery. When demand then picked up rapidly, many were still wary on how solid the trend would be. The automotive supply chain for advanced chips is typically long and this added complexity: many actors need to align and sync their demand and supply.
In January 2021, the sector saw itself confronted with a large gap between ordered and produced vehicles, coupled with a higher demand for 2021 than scenarios foresaw and much lower stocks than usual. In addition, demand for electric vehicles started soaring driven by acceleration of the green transition, increasing pressure on semiconductor demand.
Industry and market watchers expect the disruptions to last well into the second half of the year, with great variety in who will be hit and for how long. Industry sources also warn that similar patterns may occur throughout 2021 in the sourcing of other materials needed to build cars as well as industrial goods and consumer products. A continued, marked volatility in demand, driven by uncertainty around the containment of the pandemic, regional variations, and difficulty to predict purchasing behaviour, may cause disturbance in the supply of essential resources. Logistics may be vulnerable too, with demand soaring in China taking away capacity from elsewhere.
The unmistakable trend, however, is that automotive demand for semiconductors will continue to grow big time due to the increasing share of automated and assisted driving technologies to keep drivers comfortable and safe, as well as the electrification of vehicles with the required sophisticated management of battery performance and other electronics.
On average, a vehicle today already contains around a hundred advanced semiconductors chips, a steep increase compared to only a decade ago, but the value of semiconductor content of electrified vehicles can be up to three times higher. Expert estimations hold that electronics and semiconductor materials could represent up to 45% of the value of a car by 2030.
Automotive supplies are already heavily invested in vehicle electronics, covering the wide range of applications from on-board comfort and infotainment systems to active-safety features to battery and wider powertrain management. With activity and employment rapidly diminishing in combustion engine based technology, the expansion into ‘digital’ offers substantial opportunities.
Whereas the European semiconductor ecosystem currently provides employment for 200,000 people, McKinsey estimated in 2019 that under the right conditions, the automotive industry alone could create 400,000 European jobs related to electronic and software components for vehicles. Currently, 1.7m people are employed by the automotive suppliers in Europe, on top of the 1.2 by vehicle manufacturers.
However, the investments needed amount to billions of euros and the return in both revenue and employment levels is years off in comparison to the impact of the restructuring costs and R&D efforts made here and now. In this light, the semiconductor events not just underline the attention required for the diversification and resilience of the supply chain. They also raise strategic questions for Europe.
Questions that the European Commission will try to partly address through a Microelectronics Alliance for Europe, to be launched next month, in analogy to the earlier established European Battery Alliance. The German and French governments are also looking to increasing industrial activity in this field, as voiced in a joint statement this week, notable through the IPCEI instrument (Important Project of Common European Interest), and argue that the European Recovery and Resilience Funds should be used for this.
The European Commission will look at both manufacturing options as well as strategic R&I, and this is the right approach. Both aspects need careful consideration. Successful industries do not result from subsidies and government intervention towards reshoring, but follow market demand and concrete business cases. The focus on R&I will be critical, as will the availability and strengthening of digital skills and competence throughout education and employment in Europe.
The key challenge will be to secure advanced semiconductor development and production in Europe, sharing base technology between players while allowing enough space for diversification, on a scale to profitably supply a home market as well as players abroad. The Commission has rightly identified automotive as one of four sectors to focus on. Automotive globally is responsible for around 10% of semiconductor demand, yet in Europe for 37%: there will be no successful European semiconductor strategy in which automotive won’t play a key role.
The future semiconductor strategy is connected to the wider question of how to ensure that EU industry as a whole captures business and employment opportunities in electronics, software and artificial intelligence and secure its future relevance. In this light, also the upcoming Digital Decade Strategy of the Commission and the review of the EU Industrial policy will need careful calibration. The many strategies and initiatives must be coherent and mutually reinforcing.
A successful industrial strategy will have to rely on the long game of supporting R&I investment, standard setting and improving Europe’s role in artificial intelligence research, skills as well as its attractiveness for international talent. The automotive sector has the potential to serve as an essential bridgehead for the wider European industrial base to capture opportunities of an increasingly digital economy.