Origin of the Microchip Shortage & Other Constraints

There have been ongoing inventory shortages for many automotive parts throughout the 2021 model-year, The biggest impact to new-vehicle production has been the ongoing microchip shortage, resulting in the temporary shutdown of a number of automotive assembly plants. The roots of the microchip shortage started in the early months of the pandemic when auto plants worldwide abruptly shut down in mid-March 2020 and slowly began to recommence production in mid-May 2020. As a result, automotive OEMs and parts suppliers drastically cut microchip purchases.

At the same time, demand for computers and other electronics soared as consumers tried to make their new work-from-home lifestyles palatable by binging on monitors, laptops, and entertainment devices. When semiconductor manufacturers weren’t getting orders from auto manufacturers, they started to reallocate production to industries where there was a greater demand, namely the consumer electronics market.

When the automotive assembly plants reopened, vehicle sales recovered faster than expected. Automakers tried to place chip orders again; however, they found their suppliers busy making components for electronics companies. Switching manufacturing lines from one type of chip to another is a lengthy process that companies don’t undertake lightly. The supply pinch has hit auto manufacturers particularly hard because they use many chips that are lower margin items for semiconductor makers than the newer, pricier semiconductors that power 5G smartphones and video games, which are also in high demand worldwide.

Supply Constraints Go Beyond Chip Shortages

The automotive parts shortage the industry is experiencing today goes far beyond just the shortage of microchips. Today, there is a wide cross-section of automotive parts that are in short supply that varies by make and model of vehicle and type of part – all of which have contributed to delays in order-to-delivery (OTD) times. This is impacting both new-vehicle production and vehicles that are currently in operation. For instance, many of today’s fleet vehicles are being kept in service beyond their scheduled replacement date due to limited availability of new replacement vehicles. And these high-mileage fleet vehicles that are still being kept in service beyond their replacement dates are now experiencing a predictable uptick in unscheduled repairs. And when this occurs, if the replacement part is not in inventory or in short supply, it impacts the time to complete the repair, which delays getting the fleet vehicle back on the road to generate revenue. And this is especially true for fleet vehicles that have been involved in an accident. Parts constraints is a major issue at collision repair shops. Today, on average, it is now taking 15-30 days longer to get parts at body shops versus the pre-COVID period back in 2019.  And these delays typically occur when the replacement component includes microchips, which are in short supply.

All of which has resulted in longer repair cycles – measured by the time when a vehicle comes into the repair facility to when it is repaired and picked up by the driver. Nowadays, vehicles can sit non-productive for long periods at service centers waiting for a replacement part to arrive.

During this period of inventory shortages, parts prices have increased, on average, 20%-30%, and these costs are passed on to end-users. There are multiple reasons why there is a general automotive parts shortage.  Among the reasons cited are:

● The high demand for some commodities that are being competed for by many different industries, which is lengthening the lead time to get these raw materials, thereby lengthening production time. 

● Another reason given is that over the past several decades, there has been a widespread “off-shoring” or outsourcing of the manufacturing of spare parts. Since the COVID pandemic has been impacting different regions around the world at different times, it has disrupted some supply chains differently.

● Likewise, a large volume of parts manufacturing has been outsourced to Asia. Those automotive parts are typically shipped to the U.S. by container ship. And, due to a variety of reasons, there is a global backlog in maritime shipping, which is delaying delivery of imported inventory to the U.S.

● An additional factor is the shortage of commercial drivers in the U.S., which constrains the over-the-road transport of parts from ports to distribution hubs to repair facilities. 

It seems that at every touch point in the manufacturing and distribution of automotive parts, there is some incremental delay.

Most industry observers trace the start of today’s parts shortages back to winter of 2020.  But it is worth remembering that this isn’t the first time that parts shortages have occurred in the U.S. automotive industry. For instance, in the early years when import vehicle sales were increasing, their inventory of spare parts lagged behind the sales growth causing delays in the repair cycle.

While today’s parts shortage isn’t a new problem, what is new is the higher frequency of shortages that are being encountered, which is making for a more widespread impact on overall repair cycles for nationally dispersed fleets.