The Chips Will Stay Down - Supply Chain Management Review

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The news of automotive plant shutdowns owing to chip shortages just keeps coming. Some may be surprised at this unexpected casualty of the pandemic, but I saw this before over two decades ago when I created the first research with a generalizable model of Diminishing Manufacturing Sources plaguing the military.Essentially, the military had gone from the biggest buyer of computer chips in their early days to being an insignificant (and high-cost-to-serve) percentage of the market. As a result, there were few suppliers—commonly only one—which greatly increased both costs and risks of work stoppages. This problem shocked the F-22 program in the 1990’s and still afflicts the modern military.The lesson for automotive manufacturers: this is only the beginning of your supply chain woes. The root causes are multiple and inescapable. Specialized needs mean specialized suppliers, and that brings two problems. One is a reduced supplier base. In the case of automotive chips, nearly 80% come from only three suppliers, but the real danger is that these three suppliers all source from one supplier. Currently, TSMC in Taiwan produces 70% of automotive controllers. Remember that earthquake that rocked Taiwan in 1999 that spiked computer memory prices? For that matter, what about the Fukushima earthquake in Japan that similarly impacted the microcontroller market for appliances and other devices in 2011?The second problem brought on by specialized suppliers is that they often comprise a niche market, and thus a small percentage of the whole market. Automotive chips comprise about 3% of the chip market and they aren’t nearly as profitable a new chips for artificial intelligence, smartphone, and game console applications. Specialized designs like automotive chips have limited uses outside of a certain customer base, and if something disrupts the customer base, suppliers can quickly pivot to larger markets. Pivoting back provokes a round of risk assessment, and small markets with low profits seldom do well in a risk assessment. And most chips used in the automotive sector are based on decade old manufacturing practices—new chips for consumer products have higher volumes and higher margins.In other words, we’re talking about asymmetric incentives. The buyer desperately needs the inputs, but the supplier has little incentive to provide them, especially when they have an expensive new fabrication facility that needs to pay for itself with newer markets. In this unhealthy relationship, the supplier’s already low revenue don’t allow for innovation even if they wanted to. The supplier with deep pockets (such as a government) can shoulder the full burden of providing incentives to stay in the relationship. They can pay the supplier enough to stay in business, or pay even more to additionally fund innovation by paying the supplier exorbitant margins or paying a third-party to conduct research.Automotive manufacturers don’t have pockets as deep as the US government, and the writing is on the wall for the current environment of complex and inefficient market distortions. Past administrations have increased fuel efficiency standards while also creating glaring loopholes to allow companies like Tesla to sell pollution credits to subsidize production of trucks and SUV’s. This isn’t a situation that can survive for the long-term, especially in an environment where fewer young people are bothering with cars and people are driving fewer miles. Commercial trucking will grow and drive more miles on US roadways, but that’s a different market.We’re going to see more and more disruptions in markets with different clockspeeds. The pace of technological innovation will continue to increase at an exponential rate, which means use of obsolete parts will become a common issue for industries outside of the automotive sector. When was the last time your company went back to the drawing board to re-think how it designed its products and sourced its inputs? Traditional, slow, domestic industries that attempt to incorporate modern, hyper-innovative, globally sourced components have only just begun to experience the pain. The Link Lonk


February 11, 2021 at 04:03AM
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The Chips Will Stay Down - Supply Chain Management Review

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