How General Motors and Ford Could Deal with the Chip Shortage More Efficiently

GM Arlington plant 6 photos
Photo: GM
GM's Flint assembly plantGM's Flint assembly plantGM's Flint assembly plantGM's Flint assembly plantGM's Flint assembly plant
The global chip shortage has been wreaking havoc in so many industry sectors out there, and carmakers themselves have been struggling to deal with the whole thing for more than 12 months already.
And unfortunately, there are signs the lack of chips is far from over, with some analysts predicting that the struggle could even continue into 2022, despite all the investments in semiconductor manufacturing.

General Motors and Ford are two of the companies that have been hit hard by the chip shortage, and just like everybody else, they had to turn to painful solutions to deal with the whole thing. For example, both GM and Ford temporarily halted the production at some of their facilities, while also shipping some models without critical systems, such as start-stop, for example.

Right now, there are no signs that the chip shortage would be coming to an end too soon, so everybody is looking into ways to deal with this crisis more efficiently, and therefore minimize the disruption it’s causing to their operations.

Industry analysts believe carmakers need to completely change their business model, as most of them have until now worked with almost no chip inventory. Given the demand for chips has never been so insane, car manufacturers used just-in-time, or JIT, inventory, which allowed them to receive the chips exactly when they needed them.

GM's Flint assembly plant
Photo: GM
In other words, every carmaker ordered precisely the number of chips they needed, without creating any kind of inventory simply because they have always been sure no delays would happen.

So in theory, this is one of the things not only GM and Ford, but the rest of carmakers, too could change. Creating chip inventory is one way to make sure in advance that no production shutdown would be required, though, at the same time, this also means that auto manufacturers themselves need to take the risk of creating inventories, just like many large companies in various industries.

This is an idea several carmakers are already exploring, though right now, there’s a major concern that once things return to normal and the chip shortage is resolved, the industry would end up facing an oversupply, so creating an inventory in advance wouldn’t make much sense in the long term.

Then, there’s something that General Motors is believed to be exploring right now, though, at the first glance, it is an approach that would only work during these difficult times when a production disruption could happen overnight.

The American carmaker is believed to be planning a simplified supply chain that would allow the company to reach out directly to foundries. With fewer players involved in the chip supply chain, GM believes the likelihood of disruptions (be they production slowed down by the health crisis, new government restrictions, or the lack of materials) that would eventually affect its operations is substantially lower.

GM's Flint assembly plant
Photo: GM
And at some level, this could work, especially as it could help companies like GM to also reduce their overall expenses with the chip supply. On the other hand, these savings should be passed on to the customer, which is something unlikely to happen. So the simplified supply chain isn’t as easy to do as it sounds at first, especially because everybody is trying to work as efficiently as possible with foundries out there, also in an attempt to get their orders in time.

One approach that few carmakers seem to be exploring because of obvious reasons is investing in a modern chip design. Carmakers are still sticking with old chip platforms that remain in high demand right now (in fact, foundries have already moved to a new design and don’t want to expand old design capacity because it’d only be a short-term investment), as migrating to a new platform requires additional spending, especially in the testing phase, just to make sure everything is running properly.

On the other hand, Tesla is the living proof that redesigned electronics using a new-generation chip architecture is the right way to go, especially as the supply in this market isn’t by any means short, and turning to production shutdowns isn’t thus required. But for Tesla, things are a lot easier, especially as it’s a tech-oriented company and therefore developing the underlying software is much more convenient than for a traditional carmaker.

Many people out there think GM and Ford should just go for cars equipped with fewer systems, therefore the number of installed chips would be substantially reduced. Of course, this isn’t always possible due to regulations, though GM has already turned to such an approach by removing the start-stop systems on some of the cars it produces.

The bad news is that everybody expects the chip shortage to come to an end in a year or two, and carmakers might just wait for that moment to come, without changing too much on their side.

Once the production of chips is aligned with the demand, auto manufacturers would no longer need to embrace new business practices, so if anyone wants to change their approach on chips, they need to do it right now.

There’ll be no excuse if a second chip shortage happens, and carmakers are caught unprepared again.
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About the author: Bogdan Popa
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Bogdan keeps an eye on how technology is taking over the car world. His long-term goals are buying an 18-wheeler because he needs more space for his kid’s toys, and convincing Google and Apple that Android Auto and CarPlay deserve at least as much attention as their phones.
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