A global shortage of semiconductors is causing the production of parts and vehicles to be disrupted. Several major carmakers and their suppliers are being impacted by a supply bottleneck caused by diverse factors, including the effect of Covid-19 on demand in the first half of 2020 and manufacturing investment.

The shortage is the product of a perfect storm, as the automotive sector saw more volatility in 2020 than any other industry that purchases semiconductors. At the same time, capacity constraints in semiconductor facilities were caused by high demand from other industries. The subsequent recovery in car sales and factory production was stronger than expected in all areas, owing to pent-up demand during the lockdown.

Semiconductors are the brains behind a growing number of items, including vacuum cleaners, refrigerators, computers, and space shuttles. Hundreds of integrated circuits monitor airbags, power windows, catalytic converters, and dashboard displays in the typical car.

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Since automakers use many chips that were produced years ago and are lower-priority products for semiconductor manufacturers, the supply crunch has hit them especially hard. These chips have lower profit margins than the newer, more expensive semiconductors that power 5G smartphones and video games, which are in high demand around the world and dominate many production lines.

The origins of the shortage can be traced back to the early days of the pandemic when auto plants across the world suddenly shut down in response to widespread stay-at-home orders. Between February and April, auto sales dropped by nearly half. As a result, automobile manufacturers and their component suppliers have sharply reduced their semiconductor purchases.

Simultaneously, demand for computers and other gadgets exploded as people sought to make their new work-from-home lives bearable by stocking up on monitors, tablets, and entertainment devices. As a result, chip purchases by those companies increased.