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New open tipping culture

For decades, the automotive industry has been known for its supply chain stability. Every vehicle had thousands of components made by hundreds of suppliers around the world, and each of these components was placed on the assembly line when needed.

But in 2021, an otherwise very strong supply chain suddenly began to fall apart. The component in question was exactly the component expected to play a key role in both the internal structure of the car and the manufacturer’s branding his identity: semiconductors. They continue to be in short supply, meaning many cars cannot be produced on time or at all. According to the German Association of the Automotive Industry (VDA), in 2022 German automakers alone will produce around 700,000 vehicles. This is a decrease of about 13% year-on-year. Significant improvements in semiconductor supply are unlikely to materialize before the second half of 2023.

Multiple trips around the world

The shortage is due to several factors. Covid-related factory shutdowns in Asia played a role, as did fires at a major manufacturing plant in Japan in the spring of 2021. Moreover, the sheer complexity of microchip production makes them correspondingly fragile. Dr. Hagen Radowski, his senior partner in Porsche Consulting, has more than 20 years of experience in the IT industry. “Semiconductor manufacturing is he one of the most sophisticated value creation processes ever invented,” he says. During the course of production, nascent semiconductors move around the world many times. Moreover, the individual manufacturing steps themselves are highly complex. For the latest generation chips with packing densities between 5 and 9 nanometers, the fabrication process is near atomic scale with associated complexities.

What strategies and measures are automakers using to quickly eliminate current shortages and prevent them from recurring? We’re trying to get more control over the chain.This has so far proven very difficult, as most of the semiconductors in automobiles are contained in components from a large number of different suppliers. Radowski explains: Chip sourcing is now a board-level issue and a top priority on nearly every agenda. “

Dr. Hagen Radowski, Senior Partner, Porsche Consulting GmbH, 2022, Porsche Consulting

Dr. Hagen Radowsky, Senior Partner at Porsche Consulting GmbH.Credit: Porsche Consulting

Building Your Own Chip Expertise

Another equally or even more important goal for automakers is to increase the level of chip expertise. Do you mean that the approach to the question “make or buy” is changing? “No,” says Radowski. “Automakers aren’t looking to build in-house. Instead, they’re looking to collaborate with semiconductor manufacturers to develop chips, which means becoming fabless chip designers. That’s what computers, That’s what the world’s leading manufacturers of tablets and smartphones do, after which the actual production is done by independent service providers known as foundries.”

Building chip expertise in-house is more than just asking to be less dependent on suppliers. It is also the development of technical know-how itself. “Chips will eventually be the features that make both the brand and the car stand out. Automakers don’t want or can afford to delegate the product expertise that makes all of this possible to their suppliers, or even their suppliers’ suppliers.”

New production capacity in Europe

So automakers are grappling with this problem, but does that mean they can manage to eliminate the risk of future semiconductor shortages? geographically close. Bosch has announced a significant expansion of its microchip production for the automotive industry, including at his two locations in Germany.

Governments are also taking steps. With the European Chip Act, the European Union (EU) is looking to strengthen the continent’s semiconductor ecosystem. The most impressive project at the moment is Intel’s forthcoming chip factory in the eastern German city of Magdeburg, which will invest around €17 billion. However, it will be some time before large-scale production begins. Experts also point out that the low number of highly specialized manufacturers means shortages may still continue to plague the sector.

Game name: “Small but strong”

Therefore, the risk of supply shortages still exists, especially given the fact that demand from automakers and their suppliers will increase sharply in the coming years. Moreover, complex functions involved in processes such as autonomous driving will require even more sophisticated microchips. “Currently, the needs of the automotive industry are mainly in the mainstream range of he 20 nanometers or more per transistor,” he says. “As autonomous driving becomes standardized, we will need more powerful chips, smaller chips, not only in the cars themselves, but also in the infrastructure, and we will need even more chips.”

Most automakers expect semiconductor demand to grow about twice as fast as all other sectors combined over the next few years. Therefore, chip makers will have to significantly expand their production capacity. It takes at least four years to build a new chip factory, so product competition seems inevitable.

Collaboration, not competition

“We are approaching a paradigm shift in supplier management. The collaborative model involving automakers, Tier 1 and Tier 2 suppliers, and semiconductor manufacturers will fundamentally change.”
Dr. Hagen Radowski, Senior Partner at Porsche Consulting

How is the automotive industry addressing this issue? “We are approaching a paradigm shift in supplier management,” says Radowski. “The collaborative model involving automakers, primary and secondary suppliers, and semiconductor manufacturers will fundamentally change. It will play a role.” What exactly will it be? For example: “Many European carmakers and suppliers have established the Catena‑X information platform to make their supply chains more transparent and communicate their medium- to long-term needs for specific semiconductor products. can be used as a guide to plan production based on demand.” This new paradigm therefore brings a higher level of openness and transparency between competitors, enhancing collaboration. Competition will no longer drive the industry forward.

It’s not over yet: Moore’s Law

Since 1965, microchip development has followed Moore’s Law, which states that the number of transistors in an integrated circuit doubles approximately every year and a half. Wafer fabrication with packing densities below 10 nanometers is so complex, almost atomic scale, that such further increases are almost impossible. But there is still room for progress in other ways. Chip makers are working on new types of housings, creating ‘systems on a chip’ or ‘chiplets’ with ancillary functions such as storage and antennas. They also use new contact technology. By stacking multiple chip layers, even greater performance gains can be achieved in the same installation space. So there are several reasons why Moore’s Law continues to apply even when the transistor unit itself cannot be made any smaller.


First published text in the Porsche Consulting Magazine.