The National Auto parts Industry estimates that 38.2% of vehicles will suffer production delays due to a lack of semiconductors in North America.
Passenger vehicle production in Mexico is experiencing another difficult year. In addition to the challenging economic situation in the country, the Mexican automotive industry faces a global shortage of semiconductors (chips). It is forecasted that this shortage will continue throughout 2022.
Mexican automotive OEMs “will keep stoppages staggered at plants in order address the problem, and 2019 production levels will most likely not be reached until after 2024,” says Guido Vildozo, North American Light Vehicle Sales Director at consultancy IHS Markit.
Although semiconductors are very small parts, they are of great importance for passenger vehicle production in Mexico. Each new car has between 100 or more microprocessors. This technology makes the industry particularly vulnerable to interruptions in the supply of these components because they are incorporated into parts such as electrical mirrors, brake systems, tire sensors, reverse cameras, and displays.
According to Vildozo, the industry has made operational changes in vehicle manufacturing to allocate the few electronic chips in the market to manufacture the highest demand and highest profit cars. This is mainly comprised of passenger vehicles in Mexico and includes SUVs and Pickups, in particular.
The effects of the scarcity of semiconductors will be most felt by plants that produce subcompacts and compact vehicles. This diminished production will lead to a reduction in inventory during the next three quarters of the year. It is estimated that Mexico will reach a production rate of 3.5 million vehicles by 2021. The Mexican auto industry will not achieve 2019 production levels (when the number of cars manufactured reached 3.75 million) for the next three years.
Caution on purchases of passenger vehicle production in Mexico
Between 2017 and 2020, light vehicle sales fell 11.8% on average annually. This weakness in the market for passenger vehicles will be extended to include 2021. The lull in demand exists because consumers are executing caution due to the economic situation generated by the Covid-19 pandemic.
In the first quarter of the year alone, 259,039 units were produced and sold. This figure represents 12.7% less than in the same period of 2020, according to figures from the Mexican Association of Automotive Distributors (AMDA) and the National Institute of Statistics and Geography (INEGI).
In terms of the number of assembled vehicles, there was a 12% drop in the same period, with a production rate of 821,124 units. “We continue to suffer because of a shortage of semiconductors. We have not yet recovered,” says Oscar Albín, president of the National Auto parts Industry (INA). However, there are hopes that the problem will be resolved by the second half of the year.
However, some specialists estimate that the semiconductor shortfall may extend until 2022. This projection could become more likely if there is a reclosure of the economy caused by an uptick in Covid-19 cases. The situation may also be affected by geopolitical factors such as tensions between Mainland China and Taiwan. The latter is one of the primary producers of semiconductors worldwide.
“This is an issue that can’t be solved in two days. It’s a problem we’re going to see this year, and I dare to say until next year as well,” says Francisco Bautista, a leading partner of Advanced Manufacturing and Mobility for Ernst & Young (E&Y). The current situation, he says, can lead to an industry crisis, albeit “a less harmful one than others.” This is because the problem at hand has not been generated primarily by low demand but by a lack of semiconductor inputs that should, sooner or later, return to normal levels.
Amid a chip shortage, passenger vehicle production in Mexico suffered a new setback: the lack of plastic resins for auto parts production such as doors, boards, and seat coverings. This situation was created by the lack of gas supply in the United States earlier this year. However, although this situation has been rectified, it will take a few weeks to stock inventories up to their required levels.
The origin of the shortages
The shortage of micro components was caused by the Covid-19 health crisis, which accelerated the digitization of human relations through increased activity in e-commerce, online education, and distance work. This situation boosted global demand for computers, tablets, smartphones, video games, and everything that comes with the Internet of Things. All of these items are produced using semiconductor chips.
“The pandemic caused a spike in demand for semiconductors in a brutal way and came to stay,” says Bautista of the consulting firm E&Y. Currently, the automotive industry has already consumed about 5% of the microchips that are manufactured in the world. This would imply that the most significant demand is focused on sectors such as technology.
The E&Y specialist stressed that there was no drop in the supply of microchips but a higher than traditional demand. This demand will continue to grow further as the automotive industry advances towards greater production of electric vehicles.
The solution to this situation is to produce more. According to Tec de Monterrey professor Pablo López, “more than 70% of the production of these components occurs in Asia, particularly Taiwan, South Korea, and Japan; about 20% comes from the United States, and 8% is sourced in Europe.
The leading semiconductor companies are the Taiwanese United Microelectronics Corporation and Taiwan Semiconductor Manufacturing Company (TSMC), and Korean Samsung and American Intel. Bautista noted that Intel’s US $20 billion investment to build two plants in Arizona would help meet chip demand generated by the production of passenger vehicles in Mexico. Still, the result will not be immediate and sufficient to meet current needs.
Automotive industry experts predict that of the 170 models of cars and vans produced in the North American region (US, Canada, and Mexico), 38.2% will suffer production delays due to a lack of semiconductors.
“So far, we know that 65 models will be affected by the current situation,” says Oscar Albín.
“The dearth in the availability of semiconductors has affected the production rates of different brands,” says Fausto Cuevas, general manager of the Mexican Association of the Automotive Industry (AMIA). The new INA projections, which are based on those provided by IHS Markit, estimate the manufacture of 84 million vehicles worldwide this year, of which 1.8% will be affected by the lack of semiconductors. In North America, production is predicted to reach 15.8 million cars, with 383,128 vehicles impacted by the shortage. This is equivalent to 2.4% of the total output.
Nevertheless, both INA and AMIA are hopeful in their estimation that the semiconductor supply will reach the required levels during the second half of 2021. This will mean that passenger vehicle production in Mexico can proceed at its normal pace.