Do Recent Cuts to Semiconductor Part Orders Signal an End to the Auto Chip Shortage?

Industry executives see a light at the end of the tunnel for the automotive chip shortage, and declining orders suggest carmakers are rethinking their strategies for the future.

It’s no secret the automotive industry makes up a significant portion of the demand for semiconductors around the world. Over the past few years, carmakers have felt a squeeze as chip shortages impacted nearly every aspect of vehicle production.  

Today’s “supercomputers on wheels” rely on silicon more than ever. Yet, automakers have struggled to obtain the necessary components to build not only their high-tech models but also base-level sedans and SUVs.  

However, after several years of shortage, signals of replenishment are starting to show. Digitimes reports that chip vendors in the U.S. and Japan, as well as some Taiwan-based IC houses, may plan to cut semiconductor part orders by 10-20% in the second quarter of 2023. Still, semiconductor industry executives see a promising end to the year.  

Chip Shortage Eases

The auto industry has suffered more than perhaps any other because of the chip shortage. During the early months of 2021, global auto production decreased by 26% and millions of vehicles were canceled as production lines shut down due to a lack of supplies.  

This trend has slowly reversed as chipmakers ramped up production. As the supply chain continues to stabilize, J.P. Morgan predicts global car production to rise 3% this year. This would amount to the strongest year for auto manufacturing since the pandemic began.  

Most of this success can be attributed to the chip shortage easing. Though not everyone in the industry agrees, the majority speculate that 2023 will see improvements.

According to survey data from KPMG and the Global Semiconductor Alliance (GSA), 65% of semiconductor industry executives echo this sentiment. GSA data also suggests that 67% of executives expect to see a chip surplus sometime between 2023 and 2026.

Large new U.S. production facilities are one factor alleviating fear in the industry. While these will take some time to come online, they promise to increase production capacity and bring chips closer to home for many major auto manufacturers.  

Another factor is the shrinking demand for household gadgets and entertainment devices which boomed during the pandemic. As life returns to normal and demand for chips rebalances across industries, automakers have been able to obtain more supply.  

Finally, chipmakers are starting to catch up on orders after running behind schedule for more than two years. As orders are fulfilled alongside increasing manufacturing capacities, the auto industry has been able to move closer to its normal production patterns.  

So Why Are Auto Chip Vendors Cutting Orders?

While the general sentiment is that the chip shortage is coming to an end, the auto industry is still unpredictable. Economic turmoil around the world has left uncertainty in the minds of car buyers—forcing automakers to pivot their strategies.  

Digitimes cites both weak demand in the Chinese automobile market and sagging consumer power in the U.S. as reasons behind the upcoming dip in semiconductor part orders.  

Other factors may also be contributing. At the height of the chip shortage, carmakers were forced to adapt by cutting certain features from their vehicles, including wireless charging, self-driving, and high-end audio. Cutting these features, each highly reliant on semiconductors, allowed manufacturers to keep producing cars through the shortage. This approach may carry on as manufacturers develop new ways to build cars while focusing on efficient semiconductor usage.  

Another force affecting the market is carmakers bringing chip production in-house. The largest manufacturers, such as Ford and GM, have taken a page from Tesla’s book and started working with chip designers to create custom semiconductors for their vehicles—rather than relying on third-party silicon.  

While this change won’t be easy—or cheap—it seems to be the safest path forward. The pandemic and its subsequent supply chain disruption revealed glaring issues for companies that rely on semiconductors. Exiting the shortage without a plan to prevent it from happening again isn’t an option. Thus, auto manufacturers must examine alternative paths forward to ensure they always have a supply of chips.  

While it’s impossible to cite the exact reason for auto chip vendors cutting their upcoming orders, the auto industry appears primed for a rebound in 2023 and beyond as the chip shortage comes to a close. We’ll keep a close eye on this development in the coming days.

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