Six ways electronics and automotive supply chains will evolve in 2023
The global electronics industry has been undergoing a state of rapid digital transformation in recent years, and 2022 was no different.
Evolving challenges surrounding component shortages, geopolitical conflict, and the ever-present need for innovation are all putting pressure on organisations across industries.
John Ward, Senior Director – DSI Solutions, Commodity IQ at Supplyframe shares six ways he believes that supply chains will evolve in 2023 – from supply chain visibility, to increased resilience, to a stronger focus on cost, risk, and sustainability.
#1: Supply chain challenges go from the exception to the rule
Supply chains have always been dynamic, but over the past few years, from shortages to the pandemic to geopolitical tensions, the landscape has become more volatile than ever. Global supply chains have reached a level of complexity that creates a variety of challenges, and from the looks of it, this will be the norm moving forward.
Amid these ongoing disruptions, it is imperative that businesses take a long-term approach to supply chain management. In other words, according to Oliver Blume, the CEO of Volkswagen and Porsche, “challenges to our supply chains will become the rule, not the exception.”
As the industry adapts to this new normal, automakers need to be honest with themselves about what they can realistically deliver. Already, we are seeing several manufacturers scaling back over-ambitious production forecasts in 2022 and beyond. For instance, Volkswagen announced that they now plan to ship the same number of vehicles as last year, rather than their previous expectation of 5-10% growth. Meanwhile, Ford also signalled reductions to profit and delivery projections during their Q4 earnings call.
In addition to being more moderate with sheer growth and production predictions, the industry needs to consider the feasibility and scale of new innovations. Specifically, automakers should set more realistic targets with regard to the development of autonomous vehicles in 2023. Stories like the one with Amazon and Rivian pose cautionary tales about the risks of being too ambitious in this space.
Moreover, the shutdown of autonomous vehicle startup Argo AI in October 2022 also signalled a slowdown on the emergence of driverless vehicles. Developing autonomous vehicles is a costly endeavour with many moving parts, and businesses aren’t yet certain that it will pay off. Jim Farley, the CEO of Ford, acknowledged that “it’s estimated that more than $100 billion has been invested in the promise of Level 4 autonomy. And yet no one has defined a profitable business model at scale.”
While the industry will undoubtedly continue to pursue this new and promising technology, it’s important to keep in mind that timelines will likely be elongated in 2023 as the reality of balancing ongoing risks with innovation becomes apparent. These circumstances will affect margins in the coming year, further illustrating the need for capable, dynamic intelligence that can bring clarity to global automotive supply chains.
#2: Supply chains will rise to the challenges of climate change
As we head into 2023, climate change continues to be a pressing issue on the minds of consumers, politicians, and business leaders. As the effects of climate change become more apparent and destructive, businesses face increasing pressure to consider the environmental impact of their practices.
However, while consumer-facing big tech companies like Amazon and Microsoft have pledged to fight climate change, their suppliers have done little to support this initiative on a global scale. According to Bloomberg, 12 of the top 14 suppliers get only 5.4% of their energy from renewable sources, on average.
Major chip manufacturers like TSMC and SK Hynix Inc. form the bedrock of vital supply chains, and their tremendous power usage impedes efforts to fight climate change. TSMC is on track to use as much electricity on a yearly basis as the entire population of Sri Lanka, a country with around 21 million citizens, for context. But this pattern of inaction from manufacturers could be changing – Apple has publicly stated that they will work with manufacturing partners to decarbonise operations pertaining to their products. This is particularly impactful because TSMC is the sole supplier of processors for iPhones, while Hynix also provides memory components for some Apple products.
A key trend of the past several years has been the growing engagement on the part of consumers with the brands they engage with – buyers increasingly gravitate towards those who prioritize transparency and ethics in their operations. Climate change is an important piece of this, and already, consumer pressure has led to efforts such as major tech companies pledging to become emission-free.
#3: Supply chain cost and risk will become the primary focus
As the industry works to prioritise resilience in the new year, automakers will need to invest in partnerships with suppliers and manufacturers to increase visibility and understanding of cost and risk across the supply chain. This trend is already underway: for instance, Ford and GM have announced partnerships with chipmakers GlobalFoundries and Qualcomm, respectively.
Dealing with the recent string of disruptions (including the pandemic, the war in Ukraine, and chip shortages) has certainly contributed to this shift in automotive supply chains. However, more importantly, these challenges have exposed vulnerabilities. Today, automakers are aware of the issues in their supply chains, but it will take time to fully organise the resources and implement the transformation necessary to create lasting change.
While the automotive industry has been hit hardest over the past few years, shortages continue to affect every industry that depends on semiconductors or advanced chips in their designs.
Like automakers, businesses in other industries have embraced these challenges as an opportunity to become more proactive and better attuned to risk in their supply chains. In 2023, organisations will shift away from costly spot buys and focus on the financial side of their supply chains, in regard to both component cost and overall finances for the business.
#4: Governments will continue to encourage domestic chip manufacturing
Amid the disruptions of 2022 and particularly tensions with China, governments around the world enacted legislation to promote domestic chip manufacturing. In the US, Congress passed the Chips and Science Act to bolster domestic semiconductor capacity. Meanwhile, the European Chips Act is currently in deliberations and is expected to be finalised by the end of the year.
In 2023, we will begin to see the results of these efforts across various sectors. Businesses have used the new incentives from governments to plan for the construction of new facilities in the US and Europe in the near future. In addition, the funding towards the chip industry could also accelerate the pace of innovation and lead to new technologies and manufacturing processes, as time, resources, and energy are focused on research and development.
Ultimately, however, semiconductor production and the construction of fabs can be lengthy processes, so these developments may take some time to come to fruition. As challenges and geopolitical situations continue to develop, we may see additional legislation in the new year to further support the industry, both in the US and in Europe.
#5: Chip shortages will continue amid geopolitical tension
At a macro level, global political tensions remain high, and will likely continue to influence the semiconductor and automotive industries. In particular, relations between China and other nations are strained, especially in light of a recent decision from the German government to block a Chinese business’s efforts to acquire a German chipmaker due to security concerns.
The EU has also taken issue with a recent piece of legislation in the US, the Inflation Reduction Act. Specifically, the union has stated “serious concerns” with several of the bill’s tax incentives, suggesting that the act may lean too far into domestic manufacturing and alienate trusted trade partners as a result.
The EU has expressed a willingness to negotiate new trade deals, but ultimately, the landscape will remain tense heading into 2023 as both the EU and China continue to navigate trade deals with the US.
This complex situation will certainly affect the implementation of the EU Chips Act. As we are currently seeing in the US, the impacts of the legislation could take some time to fully become apparent. However, in the coming year, the development of the act and subsequent domestic manufacturing will begin to form, and during this process, the EU will need to navigate trade issues with both the US and China while the effects of the act come into fruition.
#6: New players will enter the semiconductors race
Over the next few years, other countries besides the US and EU will join the movement toward ‘electronic sovereignty’, instituting legislation to encourage chip production and research. We’ve seen this happening already in Japan, where the government recently established a consortium of eight companies to help fund and promote chip manufacturing.
In 2023, we will likely see other nations, such as India, pass legislation to jumpstart domestic chip production. But it’s important to remember that, as with anything involving semiconductors, it will take a long time to get a full picture of how funding and government initiatives play out on a global scale.