A century after automakers showed the world the value of assembly-line manufacturing, a shortage of semiconductors is teaching the industry a painful new lesson in what it takes to build a car.
For most of its history, the industry has relied on a distinct approach to buying car parts, procuring components from suppliers right at the moment they are needed. It's referred to as just-in-time manufacturing and is designed to streamline production and eliminate the costs of keeping warehouses stocked with parts waiting to be used.
But the shortcomings of that system were made clear this year as the automakers faced a lack of the chips they need to build advanced functions into their vehicles and found themselves near the bottom of chipmakers' customer lists because of their just-in-time approach. That shortage is threatening to cut $110 billion in sales from the industry, and forcing automakers to overhaul the way they get the electronic components that have become critical to contemporary car design.
"Customers need to change," said Hassane El-Khoury, CEO of ON Semiconductor, which gets more than a third of its revenue from the automotive market. "That just-in-time mindset does not work."
Semiconductor makers are demanding guaranteed, long-term orders rather than the short-term flexibility the automakers are used to. The chipmakers' assertiveness, even under pressure from lawmakers, underscores the rebalancing of power from the automakers to those that provide the advanced technology that runs their cars.
As these components play a bigger role in everything from in-car entertainment to self-driving functions, chip manufacturers say they are willing to invest in expanding production to head off a repeat of shortages that have forced the industry to mothball factories and furlough workers -- if the automakers give them orders that cannot be canceled and commit to long-term agreements.
"Why would I have invested a single dollar when my customer can cancel within 30 days and it takes me two years to build capacity?" ON Semiconductor's El-Khoury said.
There are signs the industry is listening. Last week, Ford CEO Officer Jim Farley indicated a new willingness to reverse decades of outsourcing for parts.
"As the industry changes, we have to in-source now, just like we in-sourced powertrains in the '20s and '30s," said Farley, who has shut down half his factories and seen his dealers' lots emptying because of a dearth of chips.
Most components used by the auto industry are part of a discrete chain, and automakers are at the top, able to orchestrate their suppliers' actions in a system that delivers them a set of components that can be put together quickly and cheaply into a finished vehicle. Electronics makers, who have fared much better in the chip supply crunch, regard semiconductors as essential systems, and they work directly with chipmakers to secure products and often design their devices around the chips themselves.
Automakers can no longer "assume the dominance of an 800-pound gorilla" in negotiations with chip companies and battery makers, said Mark Wakefield, head of the auto practice at consultancy AlixParters.
Pioneered by Toyota in the 1960s, just-in-time is a system where components suppliers are required to turn up with whatever the automakers want at the last possible moment in a process that pares costs to the very minimum.
That strategy has served the industry well, saving money and helping it organize a system for sourcing the 40,000 or so components that go into a modern vehicle, many of which can be made in a matter of days. But semiconductors -- the heart of sensors, engine management and battery controllers, infotainment and eventually systems that will pilot vehicles -- are created in a process that takes months. And building and equipping a factory to produce them requires years.
Today's cars contain an average of 1,400 semiconductors -- and that puts the chipmakers at an advantage. Ford's Farley said he is now negotiating contracts directly with chipmakers -- bypassing his traditional auto suppliers -- while building up inventory of the precious pieces and even redesigning models to accommodate the semiconductor companies.
"We have learned a lot through this crisis that can be applied to many critical components," Farley told analysts last month as he announced Ford would lose half its production in the second quarter and take a $2.5 billion hit to earnings this year, citing a lack of chips. "We are also thinking about what this means for the world of batteries and silicon and all sorts of other components that are really mission critical for our company."
Ford is not alone in seeking solutions that upend long-time industry practices. Automakers from General Motors to Volkswagen Group and Tesla are looking for ways to get closer to the chipmaking process, which could include forming partnerships with semiconductor companies, bringing chipmaking in-house and even building their own foundries. Nothing is off the table.
"Cars are only going to get more technical and they are going to need more chips," said Sam Fiorani, vice president of vehicle forecasting at consultant AutoForecast Solutions. "All of the vehicle manufacturers are looking at every possible scenario for getting it solved for the long-term."
But according to some chipmakers, the auto industry has embraced new technology but failed to understand those that supply it.
"There is a huge difference between manufacturing a car and manufacturing a chip," said Kurt Sievers, CEO of NXP Semiconductor, the biggest maker of auto chips. "We have been working for years closely with the auto OEMs directly when it comes to R&D and innovation -- however, not at all for supply chain and volume forecasting."
Sievers said the chip industry wants specific forecasts that stretch out in years and binding commitments to buy chips that last that long. The way automakers, referred to as original equipment manufacturers or OEMs, and semiconductor vendors work together needs to change, he said.
And the car companies have little choice but to do so. Consumers are increasingly choosing vehicles based on functions such as connectivity, entertainment and advanced automated safety features. The auto industry is steadily shifting away from fossil fuels to electric power. All of that requires more chips.
"It's no longer this subsystem that no one cares about," said Victor Peng, CEO of Xilinx, a chipmaker whose products are uses in advanced driver-assistance systems. "The electronics is really going to shape the customer experience."
The semiconductor industry has plenty of other orders to fill. In 2020 automakers bought almost $40 billion worth of chips, little changed from the prior year, even amid the crash of the pandemic. By comparison, the computer industry bought 17 percent more chips than it did in 2019, for a total of $160 billion. Phone makers, meantime, provided the chip industry with $137 billion in revenue, a jump of 12 percent.