Indian automakers, along with those across the world, are hurting from the shortage of semiconductor chips. The country’s largest carmaker Maruti Suzuki India Ltd in a filing to the exchange said it expects production at its plants to fall owing to a “supply constraint of electronic components due to the semiconductor shortage situation". Toyota, the world’s largest automaker, has also cut production of its cars and trucks worldwide by 40 percent owing to the shortage of chips.
Yet, even as these companies complain about the chip shortage, in reality the fault may lie within, or more precisely in the chips they use. Most auto companies have to perforce use the cheapest possible semiconductor chips, mostly technology of 2004-05 vintage. Effectively, Moore’s Law which states that the number of transistors on microchips doubles every two years, hasn’t been an ally of the auto industry.
Many carmakers, for instance, use chips which are based on the 45 nanometers (nm) to 90 nm fabrication processes, which were state of the art from 2002 to 2007. Currently, state of the art is 5 nm, with further miniaturisation on the horizon. Contemporary phones and laptops just wouldn't be practical on older processes but automakers are mostly stuck almost decades behind the latest technologies, partly because it is more stable and is tried and tested, a must for a car though not so much for a phone.
Most other user industries - data centres, smartphones, artificial intelligence - want smaller and smaller chips. Apple's iPhone 14, scheduled to be launched in 2022, will likely use the new 4 nm chips. To address their growing needs, Intel and other chip makers like Samsung constantly invest in ramping up production of their newest generation of chips.
No wonder that Pat Gelsinger, chief executive of Intel, said in a recent Fortune interview that it made “no economic or strategic sense” to manufacture the older generation of chips. Gelsinger told automakers “Rather than spending billions on new ‘old’ fabs, let’s spend millions to help migrate designs to modern ones.” And Gelsinger is putting his money where his mouth is. Intel, no longer the trailblazer it once was, is investing $20 billion in two factories in Arizona to make 7 nm chips for users like Qualcomm and Apple.
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But that also means chip makers haven’t been investing to increase production of the chips car companies use, leading to the kind of supply constraint we are now seeing. As it is, chip manufacturing is a capital intensive and complex business with the supply chain delicately poised at any point. The Dutch company ASML Holding, valued at $337 billion, is the lynchpin in the business since it makes the Extreme Ultraviolet Lithography (EUL) machines that are needed to produce semiconductors. ASML makes less than 100 of these machines every year, selling them to companies like Intel, Samsung and the Taiwanese manufacturer TSML. Its gross margins are a barely believable 54 percent.
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But ASML’s incredible success has come from a $5 billion risk it took 10 years ago when it bet on EUV technology. For all its advantages, it required the company’s biggest customers to completely redesign their own plants. All three ended up funding the development, even picking up equity in ASML. Today ASML has a 90 percent market share in chip making machines.
Developments like these drive the highly-strung supply chain of semiconductors with little room for slack. Unfortunately, auto companies are not in a position to experiment wildly with the semiconductors that now power most car parts. In the first place using the latest chips would push up costs significantly. Each of the two chips that power Tesla’s self-driving cars, comprises some six billion transistors. Tesla makes its own chips and other car manufacturers simply can't compete with it both on costs and on technology. That’s because Tesla can afford to price its cars much higher than other manufacturers.
Car market leaders Toyota, Volkswagen, General Motors and Ford, struggling with the Covid 19-induced downturn, are caught between a rock and a hard place. They need chips to ramp up production, but there’s a shortage of the ones they need while those more readily available are just too expensive.