All these articles seem to miss the point between why the car industry is facing shortages, and conflate it with the shortages on high end silicon devices (which have very different causes).
High end devices have seen a massive bottleneck on TSMC and in some of the required materials like ABF, combined with very high demand (new console cycle, people buying new computers for work/study from home).
The automotive sector suffers from another problem. For decades all manufacturers have converted to JIT (lean manufacturing), which means that most of them counted on almost daily deliveries of parts to keep operating. With the transport restrictions and difficulties on many countries, this has become unmanageable and unwieldy, and factory operators have made the obvious call, increase stock margins. Typically a factory might keep stock enough for a day of operations.
A manager sees that they will have problems getting their deliveries in time, so increases their orders to cover a week. This depletes the local distributor that also tries to avoid keeping large stocks. Now a lot of other managers in other companies see that part vanish, and fearing that they’ll be out of parts, they increase their stock keeping too. With boards having from 100 to 1000 unique references, the effects propagate from one manufacturer to another, while everyone runs to get enough stock to avoid having to close.
There has been no less parts than one year ago, but the massive “de-risking” means that there’s now too much demand to keep everyone happy.
Are your really sure this is how it works even for atutomotive electronics?
I am involved in the automotive industry, more in tech aspects than in comercial ones, but what I know is:
- car makers don't make their electronics. I don't know of exceptions. What they normally do is to design the architecture, the requirements and buy from Tier 1 supppliers: Bosch, Continental, Vitesco, Valeo, Delphi, Magneti Marelli etc.
- the contracts, when awarded, are multi anual and usualy specifiy the units per year during project lifetime production and in serial life (after the product is not produced, the supplier MUST GUARANTEE to be able to provide the part)
- these contracts usualy go in numbers like N million parts (ECUs) for 4-5 year total (SoP date to EoP date) + serial life for X years. Then they get detailed, even the plants where the parts are made ar negotiated. Slips on both sides come with penalty. I don't know all the details.
- lots of electronics are safety relevant (iso 26262) especially in this case, once HW design is frozen, is frozen. You cannot change silicon components easy as this will make the product undergo a long series of product and design validation which take many months => the Tier 1 supplier MUST SECURE it's own supply from chip makers.
- usual "suspects" to supply the Tier 1 are chip makers like Infineon, Renesas, NXP, STM. Probably at some point, maybe TSMC comes into the picture. There are many providers of small electronic parts.
Yes, I’ve worked with a lot of these different tiers. The thing here is that these subcontractors are squeezed so hard on margins that lean manufacturing is the only way to go.
Most automotive electronics is built around COTS (components off the shelf), which means the fab are a long way away. For instance the manufacturers you’ve mention, work with TSMC for some things, but those products are certainly not the ones for automotive. Most automotive still works on 45nm. NXP announced about 18 months that they had a design for a M7 processor on 28nm (i.MX RT1170, M7 1GHz), and for most automotive vendors, this would be considered too expensive (NXP markets it for the edge computing sector).
This is a far cry from the 7nm EUV processes that are slowing down the Ryzen 5000 rollout.
This past month I’ve had to redesign a board myself, because we were using a component from Texas Instruments targeted for the automotive sector (a DC/DC converter). Not only have all stocks vanished, some “big client” (around my area this means automotive) has already bought the whole stock (3 consecutive shipments) until Q3. And that’s from Mouser, a distributor that for a lot of these companies, is a last resort (like Digi-key, mouser provides parts and fast delivery, which of course means that you pay a premium).
Yes. I thought everyone learned a thing or two in Pandemic with toilet paper and flatten the curve.
Nope. No one cared. They just decide to make an excuse or an enemy to blame and point fingers at.
No one question why Apple didn't have the same problem, considering they are selling 200M+ iPhone ( Likley 220M+ this year ), 20M Mac, 50M iPad, or together 300M+ of their own silicon?
No one question why Apple don't have the same problem with "their" supplier? i.e Broadcom with their WiFi, Qualcomm with their Modem, Skywork, USB4 Controller, etc etc.
Everyone thought TSMC was 7-11, or Circle K or whatever Corner Shop you have in your region. They somehow would have unlimited amount of shelf space for "you" and for everyone else.
Supply Chain and Logistic Management isn't hard. All it needs is some logic and common sense. But over the past 20 years all I have seen is that Common Sense is rather uncommon.
>Supply Chain and Logistic Management isn't hard. All it needs is some logic and common sense.
I find your comment very ironic, since I remember when Apple was notorious for logistical problems that led to shortages of new products. They are very strong in that respect now, and that's how they got to be a >$1T company.
That was because demand always exceed supply, and Steve Jobs refuse to give up on the JIT management system. After iPhone 4 they finally give up. Something just dont scale.
That is not to say Apple doesn't use JIT anymore. They still do it with supply guarantees.
This is exactly what's happening currently to an extreme. If you talk to people in the semiconductor supply chain you'll find that this exact effect regularly happens, but it is currently compounded by the lack of production from the beginning of 2020.
Interesting and clear explanation, thanks!
Do you also see this as a possible driver for general inflation? Or is this JIT production mostly restricted to the automotive sector?
On a tangent: Is there any good place to learn about the current state of supply chains? I searched youtube occasionally, looking for talks / interviews with people who have in depth insight in what is happening right now (/during the last year) but I could barely find anything. Shouldn‘t this be one of the hottest topics right now?!
> Or is this JIT production mostly restricted to the automotive sector?
JIT is a major trend everywhere where logistics are involved, but in car manufacturers it's the most pronounced - simply because the sheer physical size of many components required for a car would mean that car manufacturers would need big warehouses, which they have torn down or sold many decades ago.
Instead, society has picked up the cost of storage - by building ever more and more bigger highways for all the trucks.
Not sure about jit requiring bigger highways. The components all need to be shipped sooner (and warehoused) or later (jit). Name amount of matter is transported either way.
Holy sh*t. It is so obvious. Yet I have been deceived by the media that the evil autocorps jam our roads to save a few bucks. It is very tiring that at this point we have to be sceptical about every statement that is dealt to us and peel it apart from first principles. I thought that would be the job of proper journalists...
It's not as easy. In ye olde times, car manufacturers had railway uplinks for shipping stuff around... they still have these, but trucks are (way) cheaper than railway.
> Or is this JIT production mostly restricted to the automotive sector?
It has more to do with Human side of things. No one wants to take the blame. Or similar to the old saying, no one gets fired for buying IBM. The concept is a lot easier to understand once you have worked in a large enterprise and witness it firsthand.
It you put too much inventory as backup. Someone will point the finger at you why are we having so much inventory. The world is at peace. We dont need that many.
Your CFO doesn't like your department? Great!. You have now given them enough ammunition to fire the bullet in your direction.
Your inventory might also depreciate in price. How do you know if your component won't drop price in three months time? Although that is also the case with hiking price. But politics is more about protecting your downside, not upside.
You want to put a contract that keep stable supply for at least a year with an accurate forecast of your sales. Which department is in-charge for that forecast? Let me tell you one little secret. There is no such thing as "forecast", but only educated guess.
You want a stable supply and guarantee? But your manufacture will also have to safe guard their Interest. You cant just forecast your buying volume to be 10M / year and only buying 6M, leaving 4M capacity that were allocated for you but now going empty. If you dont fulfil those requirement, you have to paid a penalty. And If you follow news around Apple, you might have heard Apple paying Samsung this penalty because their OLED panel did not meet the contract's minimum target.
In most circumstance, unless your Vendor absolutely hate you, your penalty will be paid back to you and deducted in your next order over large unit volume. i.e You are paying less for the same component next year. So your manufacture will be happy to keep you as a customer for a longer period of time.
None of these are specific to silicon or tech. Substitute the above with Walmart, Cargrill or any player from any industry. Supply Chain and Logistic are pretty much the same everywhere.
I broadly agree, especially with your description of internal politics.
But I also think it's important to admit that JIT actually has real benefits. It's not "just" a finance or paper magic exercise. JIT is an approach to answering to the question of "how much inventory do I hold at each stage of distribution", where inventory held really IS money that you can't spend else where. As in, it's money you can't spend on salary, or R&D or line expansion or anything.
The risk management part is where shit goes astray.
While big company politics play a role, IMO the main driver is that all of these companies have shifted their activities.
It used to be the case that these companies would build stuff (this doesn’t only apply to cars), and charged for that stuff, and thus had an incentive to have their well guarded IP. This era is long gone.
The manufacturing business has become a race to the bottom because this IP is no longer considered profitable. There’s a mantra in MBA parlance “externalize cost centers, internalize profit centers”. For the manufacturing sector this meant keeping the sales business, while externalizing engineering. This has gone to the point that even the subcontractors have undergone that process (that’s why there’s a “tiered” model). Nowadays most of the time Engineering is 4 subcontractors down. This also means that most manufacturers are buying from the same tech providers, and are sharing most of the IP (and their costs).
The only reason this makes sense is that car companies don’t sell cars anymore, their real business is loaning, because it turns out that manufacturing big things is an amazingly good way of generating free cashflows. Look at the earnings report of any carmaker (or GE for that matter), more than half of their earnings come from finance.
JIT is used everywhere, as it improves financial indicators because companies aren’t carrying inventory on the balance sheets. It’s also a big reason why companies in an industry cluster, as proximity to the supply chain de-risks jit.
The shift to modern inventory management coincided with offshoring. It became easier to source parts in Northern Mexico and now China as a result.
I thought it was also because they cancelled their reservations around March when the outlook was quite pessimistic and that resulted in their alotted capacity being picked up by others?
Car industry canceled a lot of orders during the first virus wave in Q1 2020 and when they wanted to increase their orders in Q3 and Q4 their former capacities were already sold. The german carmakers already tried to gain more capacity by government lobbying, Taiwan answered chip capacity for covid vaccines - so doubtful if that helps (https://www.taiwannews.com.tw/en/news/4114962).
Volkswagen and BMW already wind down some production capacity and use their chip stock primarily for the margin-high models.
High end devices have seen a massive bottleneck on TSMC and in some of the required materials like ABF, combined with very high demand (new console cycle, people buying new computers for work/study from home).
The automotive sector suffers from another problem. For decades all manufacturers have converted to JIT (lean manufacturing), which means that most of them counted on almost daily deliveries of parts to keep operating. With the transport restrictions and difficulties on many countries, this has become unmanageable and unwieldy, and factory operators have made the obvious call, increase stock margins. Typically a factory might keep stock enough for a day of operations.
A manager sees that they will have problems getting their deliveries in time, so increases their orders to cover a week. This depletes the local distributor that also tries to avoid keeping large stocks. Now a lot of other managers in other companies see that part vanish, and fearing that they’ll be out of parts, they increase their stock keeping too. With boards having from 100 to 1000 unique references, the effects propagate from one manufacturer to another, while everyone runs to get enough stock to avoid having to close.
There has been no less parts than one year ago, but the massive “de-risking” means that there’s now too much demand to keep everyone happy.