For the past 30 years, the automotive industry has been hyper-focused on increasing efficiencies by reducing variabilities. And with an industry that had remained relatively steady for decades, achieving this level of predictability wasn’t too tricky. Lean thinking has promoted a period where manufacturing leaders have continuously improved operations, focusing on this objective. However, as the automotive industry undergoes drastic waves of disruption and suppliers face the tension of new competitors, changing OEM business models, and a scarce market, the manufacturing environment is now facing a mountain of change – which is nearly impossible to predict.
Now, automotive supply chain managers across the industry must adapt to the new normal and “get in line” or miss out entirely.
Here’s how scarcity, competition, and changing vehicle architecture impact the automotive supply chain and what you can do about it.
How Scarcity is Changing the Automotive Supply Chain
When the chip shortage hit the industry at the end of 2020, most suppliers saw it as a symptom of the pandemic—a temporary issue that would eventually iron itself out. But with a full year of supply shortages, delays in production, and billions of dollars worth of missed revenue, industry experts are now expecting this shortage to extend well into 2023.
Automakers have also recognized the impact of the shortage and, in response, have begun to take the supply chain into their own hands. OEMs are now bypassing the Tier-1 suppliers that have traditionally handled semiconductor supply and are developing relationships directly with the manufacturers.
Some of the recent strategic moves from OEMs in response to the pandemic-induced chip shortage are:
- BMW AG’s direct contract with Inova Semiconductors and U.S.-based chipmaker GlobalFoundries Inc. to secure a multi-million chip supply annually
- Ford exploring direct purchasing options with GlobalFoundries
- Stellantis NV and Foxconn Technology Group joining together to develop their own automotive chips
- Plans from General Motors Co. to partner with Infineon Technologies AG and Taiwan Semiconductor Manufacturing Co. to jointly manufacture chips
- SAIC Motor Corp’s 500-million-yuan investment in GTA Semiconductor Co.
These announcements show that automakers are no longer willing to put the fate of their semiconductor supply into the hands of suppliers.
It’s Not Just Scarcity Causing Supply Chain Disruptions
If you have planned to wait out the shortage, you should think again. The supply shortage isn’t the only thing causing shake-ups for automotive suppliers and their supply chains. The entire ecosystem of the automotive industry has been thrown off balance with multiple waves of disruptions continuously hitting the market.
One of the significant game-changers is the architecture of the vehicle. As the industry transitions to electric, autonomous, connected vehicles, the construction of vehicles (and the parts needed to create them) are also changing. The value of these parts is also changing.
Vehicle value drivers are no longer derived from horsepower and mechanical build—now it’s about the software and data that powers its features.
This shift from mechanical engineering to electrical and computer engineering has created a gap in the market that is now being filled by the technology industry. Tech start-ups are swooping into the game to take on the needs of OEMs, pushing traditional automotive suppliers out of their seats. Not only does this increase competition, but it is also causing tension in the supply chain. Automotive suppliers focus on long-term, low-variability planning. At the same time, the tech industry is accustomed to a faster-paced, more volatile supply chain environment, making it difficult for the two to find ways to work together.
Another big competitor that Tier-1 suppliers must watch out for is the OEMs themselves. As noted above, automakers are taking supply into their own hands. This is partly due to the uncertainty caused by the 2020 shortage and the growing value of semiconductors in the vehicle’s design.
As vehicles become more technologically advanced, so do the semiconductors that power these features. Many vehicle architectures will soon rely on central compute systems to enable complex features such as assisted driving, autonomous driving, and advanced ridesharing.
These systems will not only remove dozens of individual semiconductors that the Tier-1 supplier traditionally provides, but it will also become one of the major differentiators for OEMs, making it unlikely for automakers to outsource such a valuable piece of their vehicle to third party suppliers.
Embracing the Change
While tensions on the supply chain are expected to loosen over the next one to two years, it would be wishful thinking to believe they will ever return to normal. The days of low-variance supply chain planning are over, and traditional automotive suppliers must embrace the change or miss out on the evolving market.
If you want to build a more resilient and sustainable supply chain amidst the chaos of scarcity and industry disruptions, download QAD’s latest white paper. This supply chain guide covers the 24 essential supply chain processes and the roadmap you need to get there.
