If “semiconductor chip” isn’t the first thing that comes to mind when you hear “critical car components,” you aren’t alone. Unbeknownst to many, the average modern car relies on around 1,450 chips to function properly, with some needing up to 3,000.
As a result, the global chip shortage that started in 2020 has adversely impacted the automotive industry. Automotive manufacturers have been struggling to compensate, but the new CHIPS for America Act passed by President Joe Biden’s White House may give them a much-needed reprieve. Today, we’re exploring the chip crisis, how the CHIPS Act stands to help the U.S. automotive industry, and what exactly chips are used for in cars anyways.
Why Do Cars Need Semiconductor Chips?
While older vehicles rely less on semiconductor chips, they’re a crucial component in modern cars. Some examples of car components that require chips to function include:
- LED lights, which house hundreds of chips – not including the control units.
- Touchscreens that control systems like air conditioning, infotainment, radio, etc.
- Safety elements, including airbags, seatbelt tensioners, emergency braking and blind-spot detection systems, automatic stabilizers, and more.
- WiFi capabilities.
In addition to components found across most modern cars, semiconductor chips are a vital component of electric vehicles (EVs). EV-adjacent technology – such as chargers – also use semiconductor chips.
What Caused the Global Chip Shortage?
The COVID-19 pandemic sparked the beginnings of the chip shortage. As employees started to work from home and students began remote learning, the need for chips increased in the personal electronics sector. Shortly after, in September 2020, the U.S. Department of Commerce placed trade restrictions on SMIC, the largest chip manufacturer in China. Those restrictions made it harder for U.S. companies to acquire chips easily.
Then, in 2021, multiple major chip manufacturing sites experienced severe weather events and fires that produced significant manufacturing delays. Russia’s 2022 invasion of Ukraine multiplied the cost of neon gas and palladium, key chip components, putting further stress on the market.
Semiconductor chips aren’t easy to create. They rely on silicon crystals, which grow at a fixed rate – speeding up the 700-step, 14-week production cycle is impossible. As a result, recovering from chip manufacturing delays is incredibly difficult. Even after providing manufacturers with increased resources, it’s a logistical nightmare.
How Did the Chip Shortage Impact the Automotive Industry?
In 2020, most vehicle manufacturers ordered fewer chips than usual. The reason? COVID-19 keeping drivers off the roads – and away from dealerships. Unfortunately, that meant the automotive industry was ill-prepared when drivers hit the roads again – and the shortage only worsened.
In 2021, the automotive industry lost over $200 billion and produced 11 million fewer vehicles due to the global chip shortage. Jessica Kelly, an automotive industry expert, said, “dealer lots are empty… I’ve never seen anything like this before.”
The need to make up those losses undoubtedly contributed to the rapid rise in vehicle prices we’ve seen throughout 2022. To further combat the impact of the chip shortage, automotive manufacturers came up with a wide range of solutions.
Many have paused production. A picture of a lot full of dormant Ford Broncos went viral as the brand halted manufacturing. Similarly, General Motors (GM) temporarily paused offering heated seats and steering wheels, promising buyers could retroactively install them once the chip shortage lightened.
Many vehicle makers also turned to technological innovation, finding ways to make fewer chips do more. Of course, such endeavors are costly, requiring the manufacturer to re-test and re-certify vehicles after such changes.
Although the chip shortage is improving – thanks in no small part to the CHIPS Act mentioned earlier – consumers can (and likely should) expect increased vehicle prices and slower production times throughout the rest of 2022 and even leading into 2023.
Will the Chips Act Solve the Automotive Chip Shortage?
Chief Executives of GM, Ford Motor, Mercedez Benz, BMW, Nissan, and other automakers urged Congress to pass the CHIPS Act. In a joint letter, they wrote,
“If the U.S. is to remain a leader in automotive innovation, we must make the strategic, forward-looking investments today necessary to enhance the capacity and resilience of our domestic and regional semiconductor supply chains.”
Now, months later, they’re getting their wish. The CHIPS Act, passed on August 09, 2022, serves a twofold purpose. One, help struggling markets – such as the personal electronics and automotive industries – combat the chip shortage. Two, reduce the need for chips manufactured in other countries within the U.S.
According to Asia-Pacific policy specialist Sourabh Gupta,
“There is a lot of money, and a lot of it is frontloaded – literally $19 billion frontloaded in this next 12 months to support chip manufacturing in the U.S. But we don’t need to have all chips or a very significant number of chips made in the U.S. We just need a certain amount of chips which will not hold the U.S. in a situation of blackmail or in a situation of peril if there are – if there is a war in East Asia or if there are others – just general supply chain snafus.”
The CHIPS and Science Act will pour over $50 billion into American semiconductor research, development, manufacturing, and workforce development. In response to its passing, several American companies announced similar initiatives. For example, Micron revealed a $40 billion investment in memory chip manufacturing.
The CHIPS Act won’t instantly solve the chip shortage. However, it can – and will – stimulate significant job growth and help the American automotive industry recover.
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