You Can’t Buy a New Car Because of Semiconductor Storages; Here Are the Lessons on Managing Uncertainties
The biggest concern for General Motors and Volkswagen is not the lack of demand from consumers. Demand for new cars is roaring back. But carmakers are stopping their production lines. They are losing hundreds of billions in sales because they don’t have enough semiconductors. Those are the tiny chips at the heart of every electronic gadget.
A modern car can easily have more than 3,000 chips. They control basic features like brakes, doors, airbags, and windshield wipers, all the way up to advanced functions like driver assistance and navigation control.
Early in the pandemic, carmakers signaled to suppliers a decline in their sales forecast. They didn’t see how sales could rebound to their previous peak in the coming years. This is an industry best known for its obsession over manufacturing efficiencies. Everyone has their own version — lean manufacturing, Six Sigma, just-in-time, or business reengineering. Unsold inventories are tantamount to incompetence.
Auto part suppliers, including Bosch and Continental, took in the warnings. They reduced orders from their own vendors. These vendors are car chip producers, who might sound less familiar to most of us — NXP Semiconductors, Infineon, and STMicroelectronics. This very long supply chain would eventually converge toward the great and final contract maker called TSMC.
How TSMC Became the Single Source to Silicon Valley
Many exponential technologies are designed in California, fabricated in Asia. Google, Amazon, Microsoft, and Apple all design their own chipsets. But none of them manufacture any. They might buy from Qualcomm or Nvidia or AMD. But these guys all outsource to TSMC in the end.
Few can beat TSMC on semiconductors. Not even Intel. Making a chipset is so complex these days that fabricating it comes down to the last two meaningful players: Taiwan’s TSMC and Korea’s Samsung. The most advanced devices are made using a technology called 5-nanometer node. Five nanometers is about the size of 10 silicon atoms. That’s how our tiny iPhone A14 chipset can contain 11.8 billion transistors. That’s how Apple whips up technology miracles like augmented reality enhanced by the built-in LiDAR sensors with everything connected by the 5G network. What has really been delivering the golden vision of California is the engineering prowess of Asia.
You may ask then, how come other countries haven’t cultivated their own semiconductor industry? Why would they all rely on Taiwan and South Korea? They did try. The US congress is passing a $52 billion investment proposal. China has been lavishing cash on the sector for a very long time. But hard science doesn’t bend because of the whims of politicians. It takes real expertise and persistently deep pockets.
The reality is that TSMC alone plans to spend over $100 billion on R&D and capital expenditure over the next three years. What other company could be so fearless? Intel is planning to spend $20 billion, and they are playing catch-up.
The irony is that when carmakers reduced their sales forecast, their suppliers got very nervous. Some invoked clauses in their contracts so that they could cancel the existing chipset orders. They claimed circumstances were beyond their control. The pandemic was akin to natural disasters like earthquakes, they said.
They didn’t need to do that. TSMC happily shifted its manufacturing capacities to other sectors. Outside of automotive, many had increased orders at the beginning of the pandemic: home appliances, mobile phones, personal computers, and healthcare devices.
Only one carmaker stockpiled.
How Toyota Escaped the Competitive Herd
There’s a built-in assumption that carmakers were making. When they slashed orders from suppliers, they assumed that when production ramped back up, chip suppliers would accommodate them.
The problem is that executives from GM, VW, or Ford failed to anticipate the basic dynamics of bargaining power. That’s an observation made clear by Ben Thompson of Stratechery.
When TSMC diverted its manufacturing capabilities from GM or VW to Apple, it could have reverted that decision, at least in theory. But it all depends on who is more important. You don’t need to be an insider to make the right guess. Purchasing volume equals bargaining power. Automotive is nowhere close to an important customer segment to TSMC when compared to other tech giants. When there is a global shortage, the big get to eat first.
The real question to interrogate is this: How could GM and VW, for example, with so much emphasis on “digitalization,” not see this coming? If their CEOs are so adamant about their digital roadmap during their investors’ calls, how could these companies pay no attention to chipset scarcity?
Except for Toyota. This is the company that invented just-in-time manufacturing to eliminate inventory. Now it has stockpiled all the way through the pandemic.
During the last financial crisis, Toyota has created a database that stores supply chain information for around 6,800 parts. Every day, every week, every month, Toyota communicates with thousands of suppliers at all levels. CFO Kenta Kon saw the complete transparency in the supply chain as part of the “rescue system.” This is how Toyota secured “one to four months of stocks as necessary.”
What Allows Smart Executives to Be Productively Paranoid
Most managers find it more attractive to focus on how to win, rather than trying to understand how they could lose. Indeed, most of us spend very little time thinking through alternative scenarios. What if this doesn’t work? What would we do then? What might make this not work?
This is human nature. Unless you have access to data, bringing bad news to an organization can be a career-limiting move. But Intel’s former CEO Andy Grove said, “only the paranoid survive.” What Toyota demonstrates is that you need organizational infrastructure to make productive paranoia possible.
The big consequence is this: in December, VW announced it would stop producing its bestselling brands, including Audi, in factories across Europe, America, and China. It furloughed thousands of workers. All this is not because of the lack of demand. It’s because the part flow from Continental and Bosch has slowed to a trickle. Not enough chipsets.
This is when Toyota wrested back the title as the world’s largest automaker from Volkswagen and safely distanced itself from Nissan, when both have few cars to sell. Toyota topped the industry again not by promising an outsized initiative. Rather, it has been investing in the mundane, in scenario planning, so that it could outsmart others in the long run.
Scenario planning is what smart leaders rely on. Risto Siilasmaa was the former Nokia chairman who had turned a dying company into the world’s third-largest telecom equipment supplier today. He said scenario planning is not just about identifying existing options but about constantly imagining and developing alternatives, then identifying the actions associated with each option. If you were to slash inventories, including chipsets, could you get them back later? What if you couldn’t? What would be the consequences?
The scenario tree is a living, growing organism, Siilasmaa said. “Each time you discuss your findings, you’ll find new sub-branches that need to be explored. New possibilities are constantly revealed, both positive and negative.”
To do this, you need the right mindset, real-time data, the organizational infrastructure for support. As for most of the car guys, chipsets are not like traditional car parts. Car people have paid less attention to them. As an auto executive said, “they don’t know how the sausage gets made at the bottom.”
And when transparency is missing from the supply chain, managers can only go by the book. They do what looks right and proper but is ultimately ineffective. “We expected a very strong recovery after the summer and we expressed that quite clearly to our tier-one suppliers,” said Audi’s procurement chief, Dirk Grosse-Loheide. That’s right. Expressing a viewpoint is all one can do when one is powerless.
This is what happen when an organization cannot plan ahead.
Thanks for reading — and be well.
P.S., What is your favorite technique that you’ve come across related to scenario mapping? What are some of the most helpful conversations you’ve had with your team when successfully navigate uncertainties?
This article has been co-authored with Lawrence Tempel, a researcher at The Center of Future Readiness at IMD.
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