23 March 2022

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Manufacturers have been struggling to get hold of enough chips for their vehicles, which has meant a shortage of new cars and vans. We look at how the issue started and when supply might improve.

What are semi-conductors?

A semi-conductor is a chip which allows current to pass more easily in one direction than the other, or has sensitivity to light or heat, or can demonstrate variable resistance.

As a result, they are used in a multitude of ways in vehicles, allowing the electrification, rather than mechanisation, of key systems. They are at the heart of all vital safety and anti-collision systems and run connectivity and infotainment centres. Even heated seats and remote boot openings use semi-conductors.

Not surprising then, that depending on its size and complexity of systems, the average car can need around 1,000 semi-conductors.

What has caused the shortage?

When Covid-19 struck in early 2020, manufacturing in the automotive sector dropped markedly in response to reduced demand and fears about how long global lockdowns might affect sales and vehicle usage for.

According to research by analysts Mckinsey, the demand for semi-conductors in automotive manufacturing dropped by around 15 per cent in the first half of 2020. In itself, this might not have been a problem when it came to ramping production back up again, if it hadn’t been for a commensurate boom in demand in other sectors, such as consumer electronics.

The result is that not only have chips become more expensive – up to 30 times higher than before, but also more chips need to be made: VW purchasing chief Murat Aksel said in October 2021 that the automotive industry will require 10% more production capacity for chips.

The chip shortage cost the global auto industry $210 billion in revenues and lost production of 7.7 million vehicles in 2021 alone, consultant AlixPartners estimated. 

What is the effect for fleets?

According to the Association of Fleet Professionals (AFP), the shortages mean that some manufacturers are quoting the end of 2022 for delivery on mainstream models. 

It added: “That means, of course, that the knock-on effects of long waiting lists will continue for a while yet, including fleets hanging onto cars and vans for longer while they await delivery, placing additional demands on service and maintenance strategies, and values in the used vehicle market remaining buoyant because of poor stock supply.

When will the situation improve?

There is some optimism that the situation will improve later in 2022. During quarterly results reporting at the start of 2022, GM CEO Mary Barra said the shortage would reduce in the second half of the year, and Hyundai predicted a return to normal levels in the third quarter.

Akash Palkhiwala, chief executive of chip firm Qualcomm was optimistic too saying, “I do think that a lot of our peers, along with us, are prioritising the auto business and shipping as much as you can,” but another CEO, Reinhard Ploss of Infineon, said there would be some improvement later in 2022, but that supply limitations “are far from over”.

The Society of Motor Manufacturers and Traders said that due to the chip shortage impacting on supply, the 2022 market was on course for 1.897m units - up 15.2% on 2021, but down -17.9% on pre-Covid 2019 levels

What can businesses do?

Quite simply, not a lot in terms of getting hold of new vehicles. If the new models are not available, it is very difficult to do anything about that other than order them and wait.

Fleets who lease can look at extending contracts on existing cars and vans rather than replacing vehicles, and those who have bought theirs can obviously hold onto them for longer.

But at an operational rather than strategic level there is something to be done: ensuring that these ageing vehicles are still running efficiently, being looked after, driven well and regularly serviced and maintained will help to keep them on the road, and avoid needing to source replacements.

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