In an interview with Anders Petersson, Business Intelligence Director at AB Volvo and a member of the advisory board for the Foundation for Future Supply Chain, I asked him about the global integrated circuits shortage and the associated supply chain issues – what has caused it and what impact is it having?
The IC shortage is a major issue for Volvo as well as many vehicle manufacturers. The situation is mainly consumer driven. Covid-19 has resulted in pent-up demand and then the stimulus packages to boost the economy in US and Europe, threw petrol on the fire. Also, of course, during Covid-19 ships have been in one place and containers in another, so supply chains have been and still are in turmoil.
The majority of integrated circuits are produced in Taiwan, Japan, and South Korea. Both the US and Europe have handed over all their production and we can see the negative effects of this now with the breakdown in the supply chain. These have been combined with some unfortunate events in Taiwan – they have just suffered the worst drought for 50 years. The world’s largest third-party semiconductor manufacturer, Taiwan Semiconductor Manufacturing Co. (TSMC), had to resort to trucking in tanks of water from the island’s greener south side to maintain production.
At Volvo they reduced their demand and turned off the flow as soon as Covid-19 hit. The IC circuits that were produced for the vehicle industry were instead produced for the PC industry, where demand was going through the roof. When consumer demand came back to the vehicle industry, this of course caused many problems.
It’s interesting to note that several producers such as TATA and BYD have said that they will start to produce IC circuits, which is a huge challenge as this is extremely complicated – they obviously feel that they need to have control of this. We are in this paradigm shift of going from globalisation to regionalization whilst still dealing with Covid-19. Companies are looking at making their supply chains more resilient, so that they can factor in this type of upheaval – they are looking at sourcing suppliers closer to home and closer to their production plants. This is already happening in different industries such as fashion, but it will take years for the automotive industry to change. A lot of the key components are produced in China, Taiwan, Japan and South Korea and will continue to be so. The movement is there to perhaps encourage suppliers to set up more production at home, but this is a very slow process.
Many OEMs are now looking very closely at their second, third and fourth tier suppliers. Where are they? How resilient are they? What are the alternatives? They are of course following the move in Europe towards their own production of integrated circuits, just like Siemens, but it’s a long-term strategy. Some of the core vehicle manufacturers have been tough and selected models that they are really going to make money on – those models will get the IC circuits and they have stopped producing other models. It’s all about prioritizing, looking over the supply chain and making changes.
Volvo’s quarterly reports which have just been published are good, but the supply situation is still a big problem. Paccar, for example, have stated that in the last quarter they could have sold between 7000 and 9000 more trucks in the US, but they didn’t have the supplies – and that’s not just integrated circuits, there are also many other supplies that are not available, such as magnesium alloys. The market is good, because the demand is there, but vehicle manufacturers are still dependent on their suppliers.
Source: Foundation for Future Supply Chain, January 12th, 2022
Author: Julia Swales