The Microchip Shortage Explained
- Why is there a microchip shortage?
- Where are microchips made?
- What does the microchip shortage affect?
- How bad is the microchip shortage?
- When will the microchip shortage end?
- Can you still lease, finance or purchase a vehicle?
Have you been struggling to search for any car? You’re not alone. Ever wondered why this is? Two words: Microchip shortage. But what exactly is a microchip? Why is there a shortage of them, and when will it end? In this article, we explore the issues related to the microchip shortage, how it has affected the production of vehicles and lead times, and what you should do if you’re looking to purchase, finance or lease a vehicle.
Why is there a microchip shortage?
So, what exactly is a microchip? Cars, computers, medical equipment and phones all have microchips in them. A microchip is also called a chip, computer chip, integrated circuit or IC. Imagine a tiny piece of material the size of your fingernail, containing billions of transistors (see image below).
These transistors determine how powerful a microchip is. With billions of these materials on a chip, you can imagine just how small and complex these tiny chips can be.
What is driving the microchip shortage? The reason there is a shortage of microchips is primarily down to the effects of the COVID pandemic, which has greatly reduced the number of materials that can be made. Why is that? When everything shutdown due to lockdown, this meant that all manufacturers had to reduce production and therefore supply was diminished by default.
Where are microchips made?
Microchips are made all over the world. The main factories are located in Taiwan, South Korea, US and China. The class-leading semiconductor companies are TSMC, Samsung, UMC, GlobalFoundries, and China’s SMIC.
You may wonder, “why can’t we make more microchips?” The facilities needed to build these materials cost years of time and billions of pounds. It’s been said microchips are the most complicated devices ever made by man. On top of this, to make the actual chip itself you need over three months, giant factories, dust-free rooms, multi-million-pound machines, molten tin and lasers.
So, why can’t we build them again? In the current climate, taking in the effects of the COVID-19 pandemic, the burning down of crucial facilities needed to make microchips, and other various factors – it’s somewhat easy to understand why and how we are where we are now.
Companies strive to make chips more powerful and power-efficient. To do this, they have to pack more transistors into microchips, making the overall process much more complicated, time-consuming and costly. So, the reason why we can’t just build more is because it’s just not that easy to.
What does the microchip shortage affect?
Production of Vehicles
We spoke briefly before about how computers, phones, medical equipment and cars all have microchips in them to make them work. So, by default, a shortage of these chips would mean that it would be a struggle, if not nearly impossible, to make these products. One sector in particular that took a hard hit was the motor industry. So how did the microchip shortage affect this? Once this shortage hit, car manufacturers had no choice but to cancel all orders. Even if vehicles were in the making, production had to be reduced and therefore supply drastically diminished.
Once the world opened up again after the COVID lockdown, there was a huge pent-up demand for everything. This generated a huge rush of orders for vehicles that had no widgets or enough microchips to build them. In simple terms, the robot arm, factory equipment and the complex machines that all needed to make cars, couldn’t make them. Without enough microchips in them, they couldn’t do their job. Unluckily, just as the demand for new cars grew, a Japanese factory containing a significant portion of microchips burnt down, which only fueled the struggle for manufacturers further.
To understand just how vital microchips are in the making of a vehicle, one car needs an average of 1,400 semiconductor chips (a semiconductor is a specific type of microchip made of silicon). We also need to remember that this is the most advanced chip in the world, so, if just one chip is missing, the car cannot be built. There is a huge expectation for you to have your vehicle from the manufacturer to the dealership or broker you purchased it from, but in these unprecedented times, delays across the globe are being experienced. Bear in mind that the different parts of a car usually come from across the globe, sometimes your car is made in the UK. However, this isn’t always the case.
Does this affect lead times on vehicles? You may have guessed it, or even lived through it. But in short, yes. Lead times have drastically affected when you get your new cars, many of the manufacturers like Land Rover Jaguar, Audi, Volkswagen, Porsche and more have all taken a hard hit from the shortage. Buyers can expect to wait even up to 18 months for some new models.
You may have noticed used cars seem a lot more expensive than they used to be or perhaps you have a young relative who is trying to get an affordable second-hand car but had no luck? Don’t worry, you’re not going insane.
The effects of the microchip shortage and lead times have had a knock-on effect on the sale of used cars. Because it is so difficult now to secure any new vehicle at all, the demand for all new and used vehicles has risen unbelievably high. This has ensured an increase in used car values, which is why they have a higher price tag than ever before. However, this value isn’t guaranteed to stay high for long.
How bad is the microchip shortage?
OSV has been in the trade for over 20 years, we’ve experienced three recessions, one flood, compliance changes and we’ve had omission scandals – all of these put together aren’t nearly as bad as the current chip shortage climate is.
The shortage doesn’t affect just the motor industry, anyone trying to make anything that thinks or does some kind of automated process has been significantly affected for the foreseeable future. This makes it even harder to try to source microchips, as there is a huge demand and competition to get them. For example, the game console market has been hugely impacted by the chip shortage with product prices soaring by up to 50% and delays in the release of new electronic products.
How has this affected your choice of vehicle? There have been delays in the launch of new vehicle models. Most manufacturers have streamlined model ranges and reduced standard specifications in cars. A number of things that need microchips have been stripped out. There was even a stage BMW couldn’t offer premium features such as an upgraded sound system, and you had to go for a standard speaker.
Similarly, thanks to the chip shortage manufacturers had no choice but to reduce luxury features in order to keep the business going. These types of decisions force manufacturers to face two questions: Should you make the vehicle at all? Or should you restrict what you sell? Due to the vast number of extra microchips needed for each premium feature, the options for customers are limited. The end result is a streamlining of options as manufacturers balance the customers’ wants vs making the cars.
This has changed the motor industry forever. To this point, due to excess supply, manufacturers have typically discounted to win on price as an incentive for customers to buy. Now, however, we’re in a world where the situation isn’t based on discount but rather, this is the vehicle and this is the price – no negotiation. Just because of how vast and tight the demand and lead times are for vehicles; buyers can only be advised to avoid negotiation and plan well ahead of time to secure a vehicle of their choosing.
When will the microchip shortage end?
So, with all this information in mind, you may stop and think: when will the microchip shortage end? Is there even an end in sight? It’s important to stay positive, but also be realistic. So far, we know that there could be a pre-covid supply of vehicles by the end of 2022. However, you won’t see a meaningful change in supply easing until mid-2023. This is due to the humongous backlog of orders. In simple terms, because orders are still being made for vehicles, on top of the already huge backlog, the order banks are getting bigger and bigger.
Exactly how long will the microchip shortage last? There is no solid answer, only a truthful guess. We think that by 2022 we may start to reach normality and by 2023 this could be a year where we are back to total normality. By the third quarter of 2023, we can hope that there will be a reduction in lead times.
Can you still lease, finance or purchase a vehicle?
Remember we said before it’s important to be realistic but think positive? Right now, there has never been a better time to lease your vehicle. Outright buying a car in today’s climate might not be right for everyone because as much as used cars are very high in value today, it’s likely this won’t be the case in years to come. The cost of running a car is made up by two things:
- How much you’re paying for it
- What it’s going to be worth when you sell it
If you outright purchased a new car today and sold it in three years’ time only to sell it for 40% less – if you could go back in time it’s likely you wouldn’t buy your vehicle again.
So, why lease a car now? Whether you’re looking for a Business Contract Lease or a Personal Contract Hire, leasing is a fantastic option to consider today with many benefits. The cost is controlled, so worse case scenario you know what it’s going to cost you. You don’t have to consider or worry about depreciation, selling your vehicle on is none of your responsibility. For more information about the advantages, read our article on the benefits of leasing.
Anyone who is seriously considering leasing should plan ahead, and this isn’t said lightly. There is a minimum wait of 6 months for most manufacturers, some even up to 12-18 months. The earlier you look at securing your vehicle and getting an idea of what you want, the more likely you’ll get it. If your vehicle is due for renewal, our best and honest advice is to look 9 months before the renewal date. If, however, you are looking for a new car and haven’t tried leasing before, now is the perfect time to begin.
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