Semiconductors are essential when building next-generation vehicles because they are used in sensors and controllers. The cars cannot be built without them.

How small are semiconductor chips? They are on a nanoscale, which means they are incredibly small. The prefix “nano” means 10.9 Therefore, a nanometer is one-billionth of a meter. Semiconductors are 0.05 as big as human hair, and according to nano.gov, human hair is 80,000-100,000 nanometers wide.

These numbers are hard to relate to. An article for Forbes by Jim Handy, published Dec. 14, 2011, makes it easier. He said the ratio between a nanometer and a hair’s width is similar to the ratio between an inch and a mile.

One surprising consequence of the pandemic and climate change has been the semiconductor chip shortage that began around February 2021 but was initially caused by the pandemic shutdown of March 2020.

The pandemic caused an increased demand for electronics as people set up home offices and spent more leisure time at home, too. They bought computer components, home entertainment devices and video game consoles. That set up a competition for chips between the auto industry and the electronics industry.

Renesas Electronics Corporation, a Japanese company that manufacturers semiconductors, had a fire at a key plant. Two notable customers who were affected by the fire include Ford Motor Company and Mitsubishi.

A water shortage in Taiwan slowed chip production. Aquifers there are low because there were no typhoons in 2020, and the rainfall between January and the end of March was half of what Taiwan usually gets. According to the South China Morning Post, the water shortage in Taiwan could cause the chip shortage to continue until 2022.

Some manufacturers were better prepared than others when the shortage began. Six Japanese carmakers, including Toyota, Honda, Nissan, and Mitsubishi, have learned from previous disruptions to stockpile important parts such as chips. Their policies allowed them to continue building cars temporarily; in contrast, U.S. manufacturers had to stop sooner.

Most semiconductor chips (more than 80%) are built in Asia. Only 12% are made in the U.S. That’s part of the reason why the chip shortage has been a problem. But manufacturing them in the U.S. is not a simple issue. Chips are made from sand. They are small and difficult to build, and one chip can have billions of semiconductors on it. The process takes three months, and the factories to build them have completely dust-free rooms: a single speck can damage a chip, making it worthless. The machines to build the chip transistors cost millions; the process also includes lasers, molten tin and water.

Intel would like to build two new chip factories in Arizona with a starting budget of $20 billion. If it can get public financing, Intel would also like to build a chip factory in Europe.

Different automakers have responded to the shortage in different ways. In addition to the obvious solution of securing more chip supplies, most manufacturers have had times when they temporarily stopped building cars and reduced their production schedules. In February 2021, Elon Musk closed a Tesla plant in California because it didn’t have enough electronic components. He didn’t provide details. In April 2021, other manufacturers cut back on their plans, including the following:

• Ford shut down four plants in the U.S. and one plant in Canada.
• General Motors halted production at several factories, including Tennessee, Michigan and Mexico.
• GM Korea stopped building automobiles at two Incheon plants. (In March, it dropped a plant in Bupyeong to 50% capacity.)
• Mitsubishi built 16,000 fewer cars overall because of the shortage. Of that total, 7,500 would have been built in Japan and Thailand.
• Subaru decided not to build 10,000 vehicles at a Japanese plant.

In June 2021, Mitsubishi, Nissan and Suzuki all stopped producing cars at some plants. Mitsubishi temporarily closed five plants located in Japan, Thailand and Indonesia. Production was reduced by 30,000 vehicles. For Nissan, the shutdowns took place in Kyushu, Japan, and at their Mexican plant. Suzuki reportedly shut down three plants for three to nine days, but a spokesperson would not confirm the information. All OEMs are prioritizing their production for their retail customers. Inventory levels at the end of July were down 1.3 million units. In June 2021, they were down 1.4 million units.

Globally, car manufacturers made fewer cars this year; AlixPartners estimated the shortfall to be between 1.5 million and 5 million fewer vehicles. Another strategy has been to prioritize where chips go. In April 2021, Stellantis announced it would use analog speedometers instead of digital ones in Peugeot 308 cars. The change made sense; Stellantis already planned to start phasing out Peugeot 308, which isn’t sold in the U.S.

What’s the bottom line for North America? NADA’s adjusted forecast for new light vehicles in 2021 is currently 16.5 million units.

Another OEM strategy has been to reduce incentives. J.D. Power expected average incentive spending per unit to be $2,065. For context, the average incentive spending per unit was $2,412 in June 2021. It was $4,235 in July 2020. Of course, that was when OEMs were offering buyers incredible deals.

Buyers have had to make adjustments as well. Inventory levels are at record lows, which means buyers aren’t just making compromises about color or trim. If they want to buy a new car, they have had to either buy a different model than the one they wanted originally or put in an order and then wait for it to be built. Dealers have helped with this process. The amount of time a vehicle sits on a lot before being sold has been shrinking, and July 2021 was no exception: J.D. Power said there was a new record of just 31 days. In June 2021, the number was 37 days, and in July 2020, it was 75 days. More than 45% of cars are sold within 10 days after they arrive at the dealership.

Prices have predictably risen, but customers have been prepared. Many people cut back on travel and entertainment during the pandemic, and they have more money to spend now as a result. The pandemic also had an indirect effect on used car prices. Staying at home meant putting fewer miles on vehicles, which means sellers can charge a higher price for vehicles with lower miles.

Manufacturers expect the semiconductor shortage to end, but they have been given a sobering lesson about the perils of just-in-time manufacturing.