IHS Markit estimates semiconductor suppliers should be able to absorb the demand by second half of 2021.
05 Jan 2021 | 17327 Views | By Shahkar Abidi
The auto industry’s recovery in the third and fourth quarters of 2020 has begun to put some signs of stress on the supply chain. IHS Markit estimates that the demand for semiconductors in the final quarter of 2020 increased at a stronger-than-expected rate. However, the estimates also indicate that semiconductor ...
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The auto industry’s recovery in the third and fourth quarters of 2020 has begun to put some signs of stress on the supply chain. IHS Markit estimates that the demand for semiconductors in the final quarter of 2020 increased at a stronger-than-expected rate. However, the estimates also indicate that semiconductor suppliers should be able to absorb the demand based on the light vehicle production forecast over the course of 2021, especially the second half.
Phil Amsrud, a senior principal analyst with IHS Markit said, “with Intel’s historic order with Taiwan Semiconductor Manufacturing Company (TSMC) before the automotive recovery began taking shape, coupled that with automotive customers having to share the highest priorities with other segments, it appears that the first half of 2021 will be a difficult period for the industry.” He further elaborates that, “The challenges will remain until lead times begin to decrease to less than 26 weeks and become in line with the usual 12–16 weeks for MCUs [microcontrollers] and SoCs.”
Despite lead time significantly increasing, there are likely to be only a few anecdotal episodes of shortages on high-demand vehicles such as pickup trucks in the US and not industry-wide disruptions. In an opportunity to overcome the supply issues, suppliers are also looking to lock down longer commitments from customers, which would provide long-term visibility for capacity planning and minimize risk of suppliers being stuck building risk inventory.
With industries opening up in the last couple of months and automotive demand increasing, there are signs of disruption in the supply chain. Recently, key suppliers and OEMs suggested the shortage of semiconductors could affect vehicle production in the world’s biggest vehicle market, mainland China. Top chipmakers have also acknowledged this shortage, and price increases may result. These chips are primarily used in Electronic Stability Program (ESP) and engine control units (ECUs).
As per IHS Markit, with demand falling for most part of 2020 due to the Covid-19 pandemic, automakers and tier-1 suppliers have reduced their inventory. Automotive semiconductor vendors have cancelled orders to external foundries, while internal capacity was halted or slowed either intentionally or as a result of reduced labour availability due to the pandemic. Additionally, there have been reports of supply issues for imported microcontrollers, leading to reduced ability to deliver to the automotive market demand in India. For example, M&M recently raised concerns over seamless availability of raw materials, especially semiconductors. "Anything around semiconductors is the primary supply chain constraint at the moment." said Rajesh Jejurikar, Executive Director, Auto & Farm Sectors, M&M informed during a virtual media meet. Answering a query on semiconductor import constraints hampering production, Jejurikar added, "While we will continue to have uncertainties with Bosch over the next few months, we would build a buffer and not let it affect our production".
Multimarket demand weighs on semiconductor supply
The increase in production of new smartphones leveraging 5G capabilities and the recent introduction of new gaming platforms, including Sony’s PlayStation 5 and Microsoft’s Xbox Series X, resulted in these segments consuming the front-end capacity available due to earlier cancelations by automotive manufacturers while demand was low and the prospects for recovery were unknown. Adding to it, with Christmas and Chinese New Year just concluded, spare capacity is in short supply, especially at the external foundries.
Can the situation improve by H2 of 2021?
Currently, there are no signs of an upcoming long-term allocation crisis, however the real risk for an allocation crisis to develop like in 2010 is if tier-1 suppliers and automakers begin panicking when faced with extended lead times and order more than what is required. Inflated orders would result in suppliers misinterpreting the actual demand, which could lead to a significant imbalance between demand and supply. It could lead to more shortages in the first half of fiscal 2021, especially for multipurpose chips such as microcontrollers, resulting in the need for an inventory correction to absorb all the excess chip production in the second half of 2021.