Automakers reset relationship with chipmakers

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Editor’s note: supply framework, which was acquired by Siemens in May 2021, is a market intelligence company that collects billions of continuous signals of design intent, demand, supply and risk factors to better inform design decisions and purchase of electronic products. Supplyframe is part of Siemens Digital Industries and its Software as a Service (SaaS) offering.

EPSNews contributor Bruce Rayner recently spoke with Richard Barnett, chief marketing officer of Supplyframe, on a range of topics, including automakers’ plans for chip design.

Q: We have been in the Covid-induced supply chain crisis for two years. What are some of the critical issues facing OEMs today?

RB: “In early 2020, the first wave of Covid was closing manufacturing plants in China, then around the world. This first series of plant closures consumed 60-70% of the total end-to-end buffer stock. Once he was gone, there was no chance of catching him. At the same time, the composition of product demand has changed dramatically. No one was buying cars because everyone was working from home or going to school virtually. Instead, audio ICs, assemblies and sub-modules destined for closed auto factories were diverted to factories building PlayStations and Xboxes. It was not company against company. It was industry against industry competing in a market with increasing supply constraints.

automotive, chips

Richard Barnett, Supplyframe

“The clock speed of IoT sensors and semiconductors for ADAS applications is totally different from mechanical transmissions. You have a new generation of IC components every 9 to 18 months, while you might be building the same transmission for five to seven years. Covid revealed that the entire automotive industry lacked the risk visibility across the entire value chain to manage the inherent dynamics of electronics.

The auto industry suffered the most pronounced economic impact with an estimated $220 billion in lost sales. I think the automotive sector will continue to suffer until 2023.

Q: The auto industry has been making noise to develop closer relationships with semiconductor companies, perhaps bringing chip manufacturing in-house, which would be a significant shift in the business model. Do you see this happening?

RB: Yes, we see that happening. Some of this was happening before Covid. We feel that in general this makes sense, as high quality is essential to the automotive experience, whether it’s a passenger car or a truck. We know that the technology behind digital mobility services defines vehicle value today. The traditional aspects of power and transmission are taken for granted.

automotive, car manufacturersBut the chip design is special. It’s different from building a transmission. You need to invest in the right talent. Large organizations have the ability to do this, and many were already doing this for specific elements of their next-gen platforms, especially e-vehicle manufacturers. They build ecosystem strategies around chip and software design with new partnerships involved in platform decisions. It was already underway before Covid.

This is central to the plan to reduce supply chain risk. But it’s a balancing act. You don’t want to vertically integrate or design in your own custom chipset because, relatively speaking, vehicle production volumes are 1,000 times smaller compared to consumer devices like smartphones. Automakers don’t want to vertically integrate because they won’t win.

The trade-off is to reduce risk by multi-sourcing critical semiconductors and components. Use off-the-shelf components whenever possible and use multiple vendors or other form-fit-for-function parts and components designed to provide more flexibility as market conditions change.

For example, at Tesla, if the part is critical to a subsystem being designed with industry partners or tier-one suppliers, it will take more control, either over the chips they are developing or, more importantly again, on negotiated long-term agreements with semiconductor partners. Additionally, it may be wise to invest in the risk premium to protect this ability. This is a new suggestion, as automotive OEMs have never assumed this responsibility, even though long-term purchase agreements in more mature mobile, communications and data center companies are a common practice.

The bigger story is how automotive OEMs will move from an arm’s length relationship to long-term agreements and risk-sharing relationships.

Q: What is the impact on high-tech supply chains of soaring geopolitical tensions?

RB: The United States has just emerged from a series of widely varying tariff threats with China. And Japan and South Korea have renegotiated a bilateral trade agreement. In addition, the USMCA Free Trade Zone in Mexico introduced new incentives for customers and local content and increased automotive production capacity.

The escalation of tensions between the United States and China is multidimensional. First it was the tit-for-tat trade sanctions under the Trump administration, then rising tensions over US access to the China Sea and the threat to Taiwan independence. . We have moved to a strategic reset regarding the sources of supply needed and the areas in which companies want to invest. The tension has created a lot of uncertainty as there is a near-term need for more flexibility, but we don’t know what the new normal will look like in terms of investment decisions.

OEMs are considering capital expenditures, such as bringing new manufacturing capabilities online or creating new manufacturing capabilities. These decisions take three to four years just to get to execution, let alone see a positive ROI. On the one hand, we have seen a very healthy diversification of new foundry capital investments committed by several players which should diversify and improve the overall situation of the semiconductor market. But you still have a lot of very sensitive geopolitical dynamics around future access to Taiwan and import restrictions on ASM technology in China. Meanwhile, China is strengthening its national infrastructure around chipset design and foundry and manufacturing technology.

It’s about accessing the underlying technology for advanced semiconductor manufacturing. These issues will continue to play out. I found it interesting that Deutsche Bank had a high tech index. They sought to estimate what the total impact of decoupling would be: the answer is up to $5 trillion in additional costs and investments over several years to theoretically replicate all of the deeply intertwined relationships. Practically, it is simply not possible to completely decouple.

We need to watch very carefully the growing geopolitical pressures. I think we’ll see more discussions and public-private partnerships start to happen with the White House. We are involved in providing information and feedback to various congressional committees seeking outside advice to shape policy strategy going forward. And we are seeing similar conversations in the EU and other places that will lead to the alignment of public-private partnerships. Perhaps new forms of directed industrial policy for long-term incentives and capital commitments.

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