Chipmaker says shortages will lead to supply chain power struggle
The global chip shortage is set to ignite a power struggle between chip manufacturers and their customers about how the industry’s supply chain works and who pays the costs of carrying inventory.
In an interview with the Financial Times, the chief executive of one of Europe’s biggest chipmakers said that customers would have to accept that their “dream is over”.
Jean-Marc Chéry, chief executive of STMicroelectronics, said that his customers, whether carmakers or car part suppliers, will need to hold more inventory or agree to more non-cancellable contracts to make supply more predictable and reduce the risk of shortages.
That would mark a shift from the current system where chipmakers hold excess inventory to accommodate the sector’s just-in-time supply chain.
“If they expect the semiconductor [suppliers] to be the bank, to keep having a big working capital to support them, they can forget it,” said Chéry.
The relationship with some big customers who buy chips from companies like STMicroelectronics “was unbalanced in the past”, he added.
Europe’s biggest chipmaker, Infineon, gave a similar warning in March that car companies need “a different model” for procuring chips.
When the worst of the shortage is over — Chéry expects that to happen by the end of the year — the time will come to discuss “the lessons” of the crisis, he said. His company had a big boost to first-quarter profits because of the shortages.
The chip shortage was caused by an unexpected rebound in demand for cars that coincided with a booming consumer electronics market.
Carmakers around the world were caught short, and had to idle or rearrange production, cutting output by up to 1.3m cars in the first quarter, according to IHS Markit. In response, chipmakers are increasing investment in capacity but also calling for structural changes to the supply chain.
The highly capital intensive semiconductor industry, which also has a long lead time for production, does about 10 per cent of its business with the auto sector. For STMicroelectronics it is closer to 30 per cent, said Chéry.
Ford chief executive Jim Farley told investors on Wednesday that the chip shortage had prompted the company to rethink how it would assure supplies of important components in the future.
“It was very interesting for me personally as the CEO to talk to many of our colleagues in other industries and to find out how common buffer stocks are, and how common direct buys are with the foundries, even if the company still buys the components with the chips on them from a supplier,” he said. “Everything is on the table,” he added.
The chip shortage could also prompt renegotiations in the automotive supply chain of prices, purchase volumes and who bears the cost of carrying larger inventories of vital parts, said Baird analyst Luke Junk.
“The depth of pain that the industry is feeling right now certainly is a conversation starter,” he said. “I don’t think we can make any conclusions right now with respect to who’s going to win that tug of war.”
The suppliers that stand between carmakers and chipmakers will be central in that fight. “I cannot imagine that car manufacturers will directly source from chip manufacturers in the future, because the complexity of the multitude of different parts and chips is extremely high,” said a representative of one so-called tier-one supplier in Germany.
“In new contracts, car manufacturers would have to commit to higher and binding order volumes than in the past in order to be able to keep up with Apple and Co, who have been doing this for a long time.”
But in March, Jacques Aschenbroich, chief executive of Valeo, a French tier-one parts supplier, defended the existing model, saying that throwing it out after one crisis would be unwise: “You have the equivalent of a 100-year flood hitting the sector . . . Does that have to call into question the whole supply chain? I do not believe so.”
Published at Tue, 04 May 2021 07:55:22 +0000
Attribution – For more Information here is the Article Post Source: https://www.ft.com/content/e40ddf7c-b81c-4e2d-8ac9-cdcff56b305c