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Volkswagen says the chip shortage will last past 2023 and the company us preparing for a ‘new normal’ in supply chain crisis

Snarled global supply chains created by a global pandemic have exacerbated a chip shortage for well over a year now, and a major automaker doesn’t think it will be resolved any time soon.

Since the end of 2020, demand for semiconductor chips has far outpaced supply of the essential components used to manufacture electronics devices. The shortage has forced carmakers, phone developers and more to reduce their manufacturing output while the wait for materials continues.

That wait is set to go on for a while yet, and German automaker Volkswagen is turning its focus towards adapting to the shortage.

“There will likely still be a structural shortfall in semiconductors up to and including 2023,” Volkswagen’s head of procurement Murat Aksel told the weekly German trade publication Automobilwoche Monday.

Rather than the chip supply increasing, Aksel warned that more geopolitical uncertainty surrounding major chip producers was creating even more obstacles in a supply chain crisis that shows few signs of resolving itself.

“This is the new normal,” he said.

Facing the crisis

The global chip shortage has been cutting into carmakers’ bottom line for years. 

In 2021, the crisis forced car manufacturers to cut output by 7.7 million vehicles and cost the industry as much as $210 billion in revenue, according to an analysis by consulting firm AlixPartners.

Car and truck-making company Daimler has had to reduce the number of vehicles it produces by a “five-digit figure” over the past two years because of the chip shortage, company CEO Martin Daum told Reuters on Monday.

Aksel said that Volkswagen has been investing heavily in early warning systems to keep production alive during this and future shortages. 

Last year, a number of German automakers including Volkswagen, BMW, and Mercedes-Benz announced they were collaborating on a cloud-based early warning system that would source data from firms at every point of the semiconductor supply chain and alert participants in the event of a disruption and help find short-term alternatives in case certain materials were not available.

In February, the chip shortage forced Volkswagen to cut output at its Wolfsburg plant, the largest carmaking plant in the world, which at its peak could produce nearly 4,000 vehicles a day. At the time, then-Volkswagen CEO Herbert Diess had already introduced an early warning system to detect supply shortfalls and that had already helped identify 150 technical alternatives to semiconductor chips.

And with semiconductor manufacturing still largely concentrated in East Asian countries, Volkswagen has also moved to guarantee supply closer to home. In July, Volkswagen’s CARIAD software unit entered into an agreement with Europe’s largest semiconductor supplier STMicroelectronics and Taiwan’s TSMC—the world’s largest semiconductor foundry—to create a more stable supply of chips for the carmaker.

Chip shortfall here to stay

Aksel is already predicting a longer chip shortage than the last time he made a forecast in February, when he told Automobilwoche that the crisis could be resolved next year. 

But with new threats and geopolitical forces rising to continue challenging the semiconductor industry this year, automakers and other parties are being forced to accept that the crisis could get worse.

“With the new geopolitical issues, if anything, it’s going to get even more complex and challenging,” Aksel told Automobilwoche on Monday.

Around 75% of global chipmaking capacity is currently located in South Korea, China, and Taiwan, according to an April report by Boston Consulting Group. 

The BCG report found that these areas are “significantly exposed to high seismic activity and geopolitical tensions” that threaten to further imperil supply chains.

Rising tensions between China and Taiwan especially have put officials in Europe and the U.S. on high alert over the future of chip supplies. 

President Biden may have added further fuel to the tense fire over the weekend, after responding “yes” when asked in a Sixty Minutes interview whether U.S. forces would be deployed to defend Taiwan in the event of a Chinese invasion.

Last August, TSMC chairman Mark Liu warned that a Chinese invasion of the island it considers a breakaway state would bring “no winners” and devastate global chip supply. Last week, European Parliament members overwhelmingly voted for a resolution that would secure supply chain agreements with Taiwan over chips in the case of a Chinese blockade of the island.

Rising uncertainty over chip supply is part of the reason behind Biden’s recently-approved CHIPS Act, which will funnel over $52 billion in incentives into the domestic chip industry.

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