Dive Brief:

• The Alliance for Automotive Innovation has called on the federal government to help fund expanded semiconductor manufacturing capacity that would support the auto industry "and mitigate the risks to the automotive supply chain evidenced by the current chip shortage," the automaker and supplier industry group's CEO, John Bozzella, wrote in a letter to Department of Commerce Monday.
• AAI surveyed its members and determined the current semiconductor shortage could result in a 2021 production reduction of nearly 1.28 million vehicles. AlixPartners forecasts a production drop of closer to 2.5 million for 2021.
• The increased capacity for semiconductor manufacturing "could be accomplished by, for example, specifying that a particular percentage – that is reasonably based on the projected needs of the auto industry – be allocated for facilities that will support the production of auto grade chips in some manner," Bozzella said.

Dive Insight:

Bozzella's letter to the Commerce Department was in response to the Biden administration's request for comment as part of its 100-day review of the semiconductor supply chain.

AAI called for part of the funding in the Creating Helpful Incentives to Produce Semiconductors, or CHIPS, for America Act to be used to build semiconductor manufacturing capacity. The legislation, introduced last June, has gained momentum as multiple industries have faced semiconductor issues that have hampered production.

Dan Hearsch, a managing director at AlixPartners, said that building out U.S. manufacturing will help long term, and some companies have already announced plans for expanding their U.S. manufacturing capacity.

Taiwan Semiconductor Manufacturing Company announced it was looking into an Arizona location last year. And GlobalFoundaries is already working to expand its U.S. capacity, according to the Albany Business Review.

"Longer term, having production in the U.S. is naturally going to happen," Hearsch said.

The shortage has resulted in companies cutting production, slowing production or partially building vehicles to be finished when parts are available, he said.

Semiconductors have faced an uptick in demand in recent months as a result of consumer spending on electronics like computers and gaming equipment. And after automakers slashed orders from suppliers in the early days of the pandemic, they have had a hard time getting that capacity back now that their demand has returned.

But it is not just demand shocks shaking the semiconductor supply chain. The winter weather in Texas and a fire at a Renesas plant in Japan have caused supply issues, as well. And further complications could come soon, as Taiwan is undergoing a bad drought, according to IHS Markit.

"Making semiconductors requires large amounts of ultra-pure water," IHS Markit said in a research note at the end of last month. "A water shortage in the region means less available water for all activities. While TSMC and [United Microelectronics Corporation​] are able to recycle over 85% of their water, additional water is required, on the order of tens of millions of gallons/day."

TSMC is managing this drought currently by trucking in water, Hearsch said Wednesday.

"Because everything is so constrained, any other supply disruptions — like the Texas weather, like the Renesas fire, like this drought if they were to be unable to maintain a supply of water —will cause more issues and they will be amplified," he said.

IHS Markit expects it will be Q1 2022 before there is enough capacity to keep up with demand. Hearsch said that it can take about six months from the time chips are ordered to when they start getting the microcontroller units that are in the vehicle.

"And then there's transport time, and then production time to turn those into automotive parts," Hearsch said.

He expects car manufacturers will be able to make up roughly 25% of missed production in Q4 of 2021. The remainder of the production will likely be pushed to 2022, as demand for new vehicles is still strong and dealership inventory is starting to get low.

"Now you're starting to get into the area where loss production is equating loss sales," Hearsch said. "So, the companies that get their vehicles made and to market are going to be in a significantly advantageous position."