GM looks to buy chips directly as shortages bite

September 24, 2021 // By Nick Flaherty
GM looks to buy chips directly as shortages bite
General Motors is planning to dramatically change its supply chain for chips as a result of the current shortages, but could well be storing up problems for the future.

Rather than relying on Tier One suppliers, notably Magna and Mitsubishi Electric for GM, as well as semiconductor suppliers such as Renesas Electronics and Analog Devices, the company now plans to buy directly from semiconductor suppliers, says CEO Mary Barra.

The US government this week gave the industry 45 days to idenfity supply chain issues and be more transparent.

At the start of the pandemic, car makers closed their factories and cancelled orders with suppliers, who consequently cancelled orders with chip suppliers and foundries rather than building inventory in the supply chain. The fire at a Renesas fab earlier in the year will also have contributed to GM's problems.

When business picked up again, there was a 12 month delay at the foundries to respond.  Car makers will have seen how the buying power of companies such as Apple and Intel have ensured delivery of chips from foundries, especially for leading edge process technology, and they want to have more say over the allocation of capacity for their chips.

Intel very clearly pointed out the importance of semiconductors to car makers at the IAA exhibition earlier in the month, with 30 percent of the cost of a vehicle being in semiconductors in the future.

US consultancy Alix Partners are predicting the chip shortage will cost the car industry $210bn this year, with 7.7m less cars being made, twice its original forecast.

“The barrel is empty, there’s nothing left to scrape,” Dan Hearsch, managing director of AlixPartners automotive and industrial practice told Bloomberg. “Going forward, sales will suffer. Sales hadn’t suffered because there was enough inventory to draw from. It’s not there anymore.”

Car makers are still having to shut down plants for want of chips. So clearly they feel they have to do something,

"We're going to make some pretty substantial shifts in our supply chain," said Mary Barra, CEO of GM in an interview this week. "We're already working much deeper into the tiered supply base because generally General Motors doesn't buy chips but (our suppliers do). But now we're building direct relationships with the manufacturers."

"As customer needs are shifting, we need more and more semiconductors," she said, saying GM was looking for short-, medium- and long-term solutions to the shortage.

The top three US car makers (GM, Ford and Stellantis) and several US chip companies, including Intel and Micron, met at the Whitehouse yesterday in a meeting convened by US Secretary of Commerce Gina Raimondo and National Economic Council Director Brian Deese.

This meeting was specifically looking at communication and trust across the supply chain and improvements in the supply chain practices of chip consumers. The group was given 45 days to provide information from all parts of the supply chain – producers, consumers, and intermediaries – on inventories, demand, and delivery dynamics. The goal is to understand and quantify where bottlenecks may exist.

The US Department of Commerce and the State Department are also now working together to manage an early alert system to proactively manage potential semiconductor supply chain disruptions linked to public health developments in key trading partners, notably Taiwan. 

However the GM solution may make matters worse. Disrupting the relationship with the Tier One suppliers will lessen their buying power and influence with chip suppliers.

There is also a very real, and very significant, risk of over-correction. With all the orders to catch up and more capacity comes on-line, the semiconductor industry is heading for over-capacity in 2023 and a collapse in the average selling price of chips.

While that may be a bonus for car makers, it will drive some semiconductor suppliers to the wall and drive further consolidation in the industry in a continuation of the semiconductor cycle.

Intel’s foundry service may provide more stability, and no doubt GM will be having conversations on how it can it can work with chip designers to ensure long term supply.

But the lesson from the chip shortages is clear. Long term strategic partnerships, where orders are not cancelled in a panic, are the way forward. This will mean more building of inventory in the hard times, and the cost of holding this inventory will be a key part of the re-structuring of the automotive supply chain.

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