A Supply Chain in Shambles

The COVID-19 pandemic has left lasting impacts in all aspects of life, such as the changes in travel, shopping, education, and more. Manufacturing has not been immune to this, and this has negatively impacted countless businesses and corporations worldwide. The automobile industry has felt the full force of these issues in regard to delayed manufacturing. I always remember driving past my local car dealerships, picking up my last-minute essentials before leaving for school. I saw the unfamiliar scene of these lots barely a quarter filled. When in the market for a car, salesmen often show you an extensive number of options in a sea of vehicles so they can meet all your criteria and close the sale. However, the number of cars in these dealerships was far below average; sometimes as low as two-three dozen. This is all due to the worldwide chip shortage. There is a major shortage in the production of chips that are a necessity in the production of these vehicles. This complex technology has various capabilities including monitoring systems and better improving car functions. Without these chips, the cars cannot be brought to the market for sale, and needless to say, this is taking a toll on many car manufacturers financially.

While many workers were either fired, laid off, or furloughed, several car companies discontinued the utilization of their assembly lines as well. The demand for cars at the start of the pandemic decreased, therefore many orders for parts and materials by these manufacturers were canceled. However, there was a huge demand for cars as the situation with the pandemic began to improve. Since people had not been spending as much money during these lockdowns, the demand for automobiles skyrocketed. These dealerships could not fulfill this demand for too long because of the halt in manufacturing of materials, especially chips.

Chip manufacturing was impacted to an extent, but there were other products that utilized this chip technology. There was a sharp increase in the demand for phones, computers, etc. As I am sure we are all too familiar with, online platforms were used for many different purposes, ranging from three-hour lectures to game nights with extended family. Chips are needed so laptops, televisions, smartphones, and more can operate. As the demand for cars decreased, the demand for smart tech was exponentially on the rise. So, as a result, the automotive industry took a hit to this rising demand.

The automobile industry saw these issues coming. The initial shortage was bound to have some rippling effects that would continue to affect companies throughout the year. The consulting firm known as AlixPartners has been following this situation closely. The initial prediction for revenue losses was $60.6 billion, determined back at the end of January 2021. However, financial analysts began to realize that this supply chain backup was going to get much worse before any substantial improvements. Another prediction was made in May at $110 billion, an almost 82% increase since the last projections. The backup continues to get worse with the projections now reaching towards a $210 billion decrease in revenue for the entire automotive industry worldwide.

This has put chip manufacturers in a difficult situation, and a quick economic analysis can explain their reasoning here. Being a provider for so many other industries, these manufacturers have to make decisions as to who they are going to do business with. What clients are going to bring in the most revenue, and will the demand for these other products increase or at least remain consistent in the long run? While going through this thought process, chip manufacturers were analyzing opportunity costs. Given the course of action they took, they realized that although there may be a demand for cars on the horizon, there is an even greater demand for smart tech. This was a very strategic choice on their part. They believed that the reward would be greater if they sacrificed fulfilling the orders for the automobile accounts versus those for smart tech. As stated, chip manufacturing was impacted by the pandemic as well. There was not an abundance of inventory for these companies to utilize; they needed to be mindful of who they were going to do business with during this time.

Although the pandemic is not over yet, it is exciting to see how things begin to transition back to the pre-COVID world. I am looking forward to making up for lost time over the past almost 2 years, and I can speak for both myself and others when I say that I cannot wait for things to return to the way they were. However, just as this transition will take time, the industries affected by this chip shortage will not be recovering right away either. As stated, AlixPartners has been analyzing this unique situation, and although optimistic, they do believe that inventories will take some time to recover back to the level they should be.

Throughout the pandemic, there has been this common theme of a hopeful recovery. Whenever cases were on the rise, it was stated to take care of yourself in order to minimize overall exposure to the public. The more people take steps to stop the spread, the faster normalcy can make its return. While it has taken our society longer than expected to recover from this, the same can be said for the automobile industry. Companies are hopeful that they will begin making a strong recovery as we are about to enter the new year, but we have been no stranger to unpredictability during the past two years. It will be interesting to see if the automotive supply chain does re-organize itself in the coming months and how quickly companies will be able to recover once their inventories are brought back under control. 

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