Supply Chain Management in the Automotive Industry

Topic: Business Words: 3509 Pages: 13 Mar 7, 2023

Introduction

The automotive industry is making an impressive recovery from the effect of the COVID-19 pandemic. The demand for cars in the global market has been on the rise over the past year, and leading manufacturers are struggling to match their supply with the request. One of the main challenges that these automakers face is the global semiconductor chip shortage. Najjar and Yasin,(2021), specifically identified the semiconductor chip used to make driver navigation systems and computer management for engines as being in short supply. A trend is also emerging where countries leading in the production of these chips, such as China, prioritize local customers, making it difficult for leading car manufacturers such as Toyota, Ford, Nissan, and Volkswagen to have access to this critical car component. The paper seeks to discuss this problem to find ways in which the automotive industry can overcome the challenge.

The Supply Chain Challenge Facing the Sector

The global automotive industry is facing a new challenge of the scarcity of semiconductor chips. As the demand grows, the car makers are unable to match it with the supply. According to Rothrock (2019), General Motors and Ford Motor were forced to reduce their production capacity because of the scarcity of chips. The limited supply of this material means that its price has gone up due to the increase in demand. The effect is that the overall cost of producing a unit car has gone up. It is necessary to look at specific factors that have caused this shortage.

Slowed Production of Semiconductor Chips Caused by COVID-19 Pandemic

The current problem that the automotive industry faces is significantly attributed to the COVID-19 pandemic. Ghadge et al. (2021) explain that China and Taiwan, which are some of the leading producers of these semiconductors, were affected by the spread of the virus. The United States became the epicenter of this pandemic, which forced the government to shut down the economy to protect lives. It meant that many companies had to close down in response to the directives given by the government. A few that managed to continue with their operations had to reduce their production capacity because of the plummeted demand, limited supply of raw materials, and the minimal number of employees who could physically come to work at the factories.

As the global community started making a recovery from the pandemic, the automotive industry achieved faster growth than that of the semiconductor chips. Most of these technology companies are struggling to make a comeback (Najjar and Yasin, 2021). They have to get their raw materials from foreign countries which are still struggling with the pandemic. Some of them have also lost their employees, while others have to redefine their entire operating system in response to the new guidelines given by the government to help manage the spread of the virus. The effect of these challenges is that most of these companies are unable to meet the production capacity they had before the pandemic struck. For instance, Taiwan Semiconductor Manufacturing Company Limited (TSMC), which is one of the world’s largest producers of the semiconductor chip, has been struggling to meet its pre-COVID-19 production capacity because of numerous challenges.

First, the company lost some of its talented engineers to the virus and finding their replacement remains a challenge. Secondly, the company is facing the problem of sourcing the raw materials needed for the manufacture of the chips. It is also apparent that the new regulations set by the government are making the production process more challenging and costly than it was before. These factors have significantly reduced the production capacity of the firm. The effect of the reduced production has reverberated through the automotive industry. Although there is an effort made by the manufacturers of these semiconductors to address the shortage, car manufacturers feel that there is a need for them to have greater control in the manufacturing of this important car component (Alicke, Azcue, and Barriball, 2020). At the moment, they have to manage their production capacity in line with the available semiconductor chips.

Travel Restrictions in Some Parts of the World

The United States, Germany, Japan, and the United Kingdom, which are some of the leading manufacturers of automotive in the global market, may have managed to control the spread and effects of COVID-19 through proper vaccination and other practices. However, some countries are still struggling with the resurgence of the virus. China, which is currently the leading country in the manufacturing of semiconductor chips, has witnessed cases of a resurgence of the virus in some of its most populous cities (Kim and Qureshi, 2020). Malaysia is another country that has issued new travel restrictions to help limit the spread of new variants of the virus. It is currently one of the top producers of semiconductor chips in the world (Page and Tarp, 2017). Those who wish to travel to this country may find it challenging to do so. Such restrictions have worsened the problem for car makers.

In the field of business, sometimes it becomes necessary for top executives to visit large manufacturers to sign mutually beneficial business deals. Unfortunately, the current travel restrictions in some of the source countries mean that car manufacturers in the United States, Japan, or Germany cannot make such travels. They have to rely on their agents in these countries to help them have access to these products. The problem is that these third parties will always ensure that they take care of their interests first (Huanga, Sheoranb, and Keskar, 2005). It explains the reason why the cost of these products has been going up. For price-sensitive car manufacturers such as Toyota, cases of an increase in the price of production may have a devastating impact on their international sales.

Economic Nationalism

The current COVID-19 pandemic may be one of the major causes of the sharp shortage of semiconductor chips needed by the automotive industry. However, there has been an emerging issue that many firms have ignored over the past few years. Economic nationalism is emerging as a major challenge that affects the accessibility of raw materials for some of the leading manufactures in the automotive industry. The concept of state interventionism is an emerging global concern that cannot be ignored (Khare, Odake, & Ishikura, 2021). Cases, where market mechanisms such as demand and supply are not allowed to control the production and sale of products, is emerging concern in the industry.

The ideology has been in common in China, which is currently the second-largest economy in the world. The Chinese government has significant control over the activities and operations of firms within the country. The government can dictate how these companies sell their products both locally and internationally (Sawik, 2020). A trend has emerged where the government requires manufacturers of these rare semiconductor chips to prioritize local automotive industries when selling the products. It means that the local demand has to be met first before that of the international market. As the number of small car manufacturers continues to increase in China, the local demand is growing. It means that large car manufacturers such as Ford Motor, Volkswagen, Toyota, and General Motors, which are based out of China, may find it difficult to access these materials because of economic nationalism.

The recent trade wars between the United States and China may worsen the situation. When the United States increased tax for products coming into the country from China, the Chinese government responded in a similar way by increasing tax on goods from the United States (Sumantran, 2017). The problem with such trade wars is that a government can limit the sale of raw materials to foreign states considered hostile. The Chinese government can use its power over local companies to restrict the sale of semiconductor chips to American companies as a retaliatory measure. As the two governments engage in such trade wars, the biggest casualties are the automotive manufacturers in the affected countries.

Limited Control in the Semiconductor Chips Production

Leading car manufacturers in the global market have expressed their concerns about their inability to control the production of semiconductor microchips. As Katrin (2021) observes, specialization is an aspect of the modern industrial revolution that has enhanced production capacity in various industries. Instead of Toyota producing all the components of the car, it specializes in what it does best. As such, the production of car tires is left for companies such as Bridgestone, Firestone, Goodyear, and Michelin. Contemporary Amperex Technology Co., LG Energy Solutions, Panasonic, and Samsung SDI specialize in the production of car batteries (Wu1, Zhang, and Du, 2021). Hella GmbH & Co. KGaA, Koito Manufacturing Limited, and Magneti Marelli are some of the leading automotive lighting companies. Similarly, Intel Corporation, Taiwan Semiconductor Manufacturing Company, and Broadcom Inc. are some of the top manufacturers of semiconductor chips.

Car manufacturers are rarely involved in the production of some of these crucial car components. It means that they have to wholly rely on the manufacturers of these components to facilitate their production. The problem is that sometimes these suppliers fail to meet the demand of the market. At the moment, the automotive industry has registered impressive growth because of the increasing global demand. However, the suppliers of these critical car components have failed to respond to the increase in demand. Some of the car manufacturers feel that their limited control in the production of semiconductor chips is partly to blame for their current problem.

The Root Causes of the Problem and the Basis for a Solution

The automotive industry is making an impressive recovery from the effects of the coronavirus pandemic. However, the growth may be affected significantly by the limited supply of semiconductor chips. If the current problem is not addressed effectively, the automakers may be forced to lower their production despite an increase in the global demand for their products. When finding a solution to this problem, it is essential to start by investigating the root causes to make it easy to address the issue that the industry faces.

Poor Coordination between Suppliers and Car Manufacturers

One of the factors that have emerged as a major root cause for the problem is the poor communication and coordination between car manufacturers and semiconductor chip producers. Toubes and Araujo-Vila (2021) explain that there was a general assumption among the car manufacturers that the suppliers of the semiconductors will respond efficiently to the demand changes in the market. As such, they started increasing their production capacities in response to the increase in market demand. On the other hand, most of the suppliers of semiconductor chips were still reeling from the effect of COVID-19 (Mahoney, Smit, and Wilkinson, 2021). At the same time, there was an assumption among these suppliers that the market would experience slow growth because of the effects of the pandemic. The poor coordination led to a situation where the supply of the chips was significantly lower than the demand. Suppliers have failed to respond in a timely manner to the demand because some are still readjusting their operations following the effects of the pandemic.

Logistical Challenges Caused by COVID-19

The global community currently faces less severe effects of the COVID-19 pandemic because of the freely available vaccine from numerous manufacturers. However, it is still worrying that thousands of people still die of the virus daily in some parts of the world. As such, there is yet to be a full recovery from the pandemic in countries such as Russia, China, the United States, and parts of Western Europe (Nguyen, 2021). It means that logistics is still a challenge that automotive manufacturers still face. These products have to be moved by humans from the point of the manufacturer to the premises of the automakers. In most cases, such logistical activities involve cross-border movement.

The pandemic has made it more challenging for a person to move from one country to another. There is the need for one to produce a certificate of vaccination in some countries. Challenges arise when a given country fails to recognize vaccination done in some countries or using a specific brand of vaccine. In such cases, a driver, a pilot, or a ship captain may be denied entry into a destination country because of the fear that they may spread a new variant of the virus. The process of regular testing for the virus is not only a painful and uncomfortable process for most of the people involved in the logistics, but it is also a time-consuming process.

Semiconductor chips cannot move fast enough from the point of manufacture to the market. Tribe (2021) observes that there is also the issue of mistrust among those involved in the logistics of these products. For instance, when products are moving from India to the United States, there is always the fear that cargo handlers from India may have the Delta variant of the disease. As such, the American counterparts may be cautious when interacting with them. The process of taking extra precautions to avoid the possible contraction of a new variant of the virus causes unnecessary delays in processing the imports and making them available for the local automotive manufacturers.

Unpredictable Market Forces and Poor Market Forecast

The current problem that automotive companies face in the market today is partly caused by unpredictable market forces. When the COVID-19 pandemic struck, most of the global economies experienced slowed growth (Bérubé et al., 2020). Many people lost their jobs while others experienced a significant cut in their salaries. As a result, many economists predicted that there would be a slow recovery. One of the sectors that expected to have a slow recovery was the car industry. The assumption was that when people get back to work, they will address their basic needs first and focus on repaying their loans before they consider purchasing a car. However, that was not the case as the demand for cars grew rapidly when the economy came out of the shutdown. The automotive market was highly unpredictable, as Nguyen (2021) observes. There was a massive increase in the demand for cars both in the local and global markets.

The players in the automotive industry and economic experts had made a poor market forecast. There was a general belief that it would take time before the global demand was restored to pre-COVID status. As such, suppliers were also keen to ensure that they avoid overproduction to eliminate cases where they flood the market with the semiconductor chips, leading to a drastic drop in the market. As the demand surged beyond the initial market forecast, car manufacturers were able to respond quickly to the need because they had the infrastructure to do so. However, it has taken time for the semiconductor chip manufacturers to respond to the emerging market forces. The result is a sharp shortage in the supply of these products, which are currently in high demand. Poor market forecasts can have a devastating impact on the supply of products in the market, as Korstanje (2021) notes. It is taking longer than expected for the suppliers of this important car component to respond to the market demand.

Improved Communication and Coordination

One of the root causes of the problem was identified as poor communication and coordination between suppliers on the one hand and automotive manufactures on the other. It is critical to find a way of addressing this problem effectively. These automakers spend a significant amount of their income to conduct market research to determine, among other things, the demand for their products (Seitz, Akkerman, and Grunow, 2021). Once this information is obtained, it is recommended that they should immediately share it with their suppliers. As they adjust their production capacity, the suppliers should also be duly informed about the number of products needed. This way, there will be an adequate amount of semiconductor chips available in the market to meet the demand.

The current situation where there is a sharp shortage of this important product in the market will be avoided. Proper coordination between the suppliers and the manufacturers also makes it possible for the car industry to understand when there is a challenge faced by the semiconductor chip makers that limits their production capacity. The automakers can then adjust their production capacity accordingly to reflect the availability of the needed car components.

Vertical Integration

Some of the leading global car manufacturers have explained that the current problem is partly caused by their limited control of the semiconductor chip industry. They feel that despite their size and financial strength, they are always at the mercy of the semiconductor chip makers. One of the best ways of eliminating the problem is to embrace vertical integration or growth (Najjar and Yasin, 2021). The strategy involves the merger and acquisition of semiconductor chip makers in the market. The best method would be to acquire small or mid-sized but successful semiconductor chip makers in the local or global market. The firm then takes full control of these chipmakers. The strategy will enable the firm to have a steady supply of the needed car component. The automaker will eliminate all the middlemen who tend to inflate the overall cost of these products. It means that the firm will not only have complete control of the supply of the needed development, but it will also lower the cost. The strategy will also enable these companies to increase their revenue streams by selling their excess semiconductor chips to other companies.

Improved Global Economic Cooperation

Some of the challenges identified above are beyond the control of individual firms or even the entire automotive industry. The economic rivalry that was recently witnessed between the United States and China cannot be controlled by the industry or its individual players (Najjar and Yasin, 2021). As such, governments need to improve economic cooperation as much as possible. The United States has products not available in the Philippines but are needed locally. Similarly, some of the products available in abundance in the Philippines are not produced in the United States. Such two countries need to have economic cooperation to facilitate international trade. It requires effort and goodwill from the political rulers in the global community. Unnecessary trade wars may have a devastating impact on the automotive industry. Political issues should find a political solution without affecting the economic environment.

Improved Logistics

The analysis above showed that poor logistics is another major issue that is affecting the availability of semiconductor chips in the automotive industry. Individual players in the industry can find ways of addressing this problem. One of the best ways is for a firm to establish its own supply chain to enable it to acquire products from the manufacturers directly. The firm can then arrange for its transportation of these products to its production plants (Nguyen, 2021). Another strategy is to work closely with the leading logistics companies in the global market, such as DHL Supply Chain, UPS Supply Chain Solutions, or XPO Logistics, to facilitate the movement of its products.

The parties can have a long-term contract that defines how the selected logistics firm should handle these products once they are received, and the time it should take to make them available in the manufacturing plants. Addressing the current concerns relating to COVID-19 is another area that should be considered when addressing the problem (Kim and Qureshi, 2020). Besides ensuring that its staff is fully vaccinated, an automaker may introduce other layers of protection to assure employees that they are safe when handling imported products.

Conclusions

Supply chain management in the automotive industry was significantly affected by the outbreak of the COVID-19 pandemic. Most of the car makers are currently unable to have access to the semiconductor chips needed to manufacture engine computers and driver navigation systems. The investigation reveals that the problem is so severe that it has forced some of the leading car manufacturers such as Ford Motor, Volkswagen, Toyota, and General Motors to lower their production capacities despite the growing market demand. The study has proposed various ways in which these firms and the entire industry can overcome this challenge. Improved communication and coordination, mergers and acquisition, enhanced global cooperation, and improved logistics are some of the strategies that can help in addressing this problem. The players should also ensure that their employees are protected against coronavirus while they are at work.

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