There are not enough silicon chips to go around. General Motors, Ford and other companies lack the supplies needed to make enough cars. Covid-19 is only partially to blame. To get back on the right track, automakers need to look to Apple, and its groundbreaking iPhone in particular, to learn how to manage their supply chains.
Chip shortages have hit automakers’ profits, with GM, Ford, BMW and Daimler forced to cut production capacity despite strong demand. They have announced a series of initiatives in response, going as far as designing their own chips. The root of the problem is that automakers have outsourced decision-making, keeping inventories too low and contracts too short.
Large automakers work with so-called first-tier suppliers, who specify parts to a high standard. Suppliers translate those requirements into orders for specific parts. Automakers don’t necessarily know what chips are capable of, and semiconductor makers don’t really know what each car company needs. What’s worse, orders are often short-term, with commitments often only lasting weeks rather than the year-long deals common in other industries.
Apple architect Steve Jobs would turn in his grave. The iPhone was a triumph of customization and the integration of cutting-edge hardware and software. Apple sources its carefully designed parts and manufacturing capabilities directly from select partners. Relying on third parties to source components based on large-scale specifications would never have worked.
Despite global shortages, the company increased phone shipments by more than 20% year-on-year in the third quarter, according to research firm IDC. General Motors, for its part, has seen its vehicle deliveries in the last quarter fall by around 43%.
The automakers’ suppliers can’t respond as effectively as Apple’s. The status quo is even less sustainable as cars become more technologically sophisticated, with GM and others anticipating billions in revenue from technology-enabled services. Things could be changing, though: Ford, for example, announced a partnership with chip firm GlobalFoundries in November. If automakers begin signing long-term contracts directly with semiconductor producers, these suppliers will be able to afford to invest in new foundries and designs.
It’s a start: Big automakers are scrambling to catch up with EV leader Tesla, whose boss Elon Musk is obsessed with control, like Jobs. They need to follow the Cupertino playbook more and the Detroit playbook less.
The authors are columnists for Reuters Breakingviews. The opinions are yours. The translation, by Carlos Gómez Abajo, is the responsibility of Five days