> What has made the auto industry particularly vulnerable is its reliance on just-in-time delivery, where parts are brought in when needed, rather than being stockpiled.
It's fascinating that the response is to close production rather than increase prices.
Those warning of inflation point to events like this as support. But inflation requires that higher producer costs be accepted by consumers.
And for that price transmission mechanism to work, there needs to be supply actually available at the higher price. It appears that just-in-time economics mean that in the event of a shortage your supply just goes offline. You don't get higher prices, just empty shelves.
It sort of does help; chip prices have risen because customers are out-bidding each other. If you're willing to pay 10x 2019 prices you can probably get whatever chips you need. Many companies are deciding that's not worthwhile.
>If you're willing to pay 10x 2019 prices you can probably get whatever chips you need. Many companies are deciding that's not worthwhile.
The problem as I understand it is a company like TSMC sells capacity for the some time period - like a year. The automakers thought people wouldn't buy cars, so they relinquished their slots. Turns out car demand exploded, so they went back to TSMC and said "hey we need those slots" and TSMC said "sorry your slot already got sold to nvidia".
Chrsyler could offer to pay TSMC 10x more, but that that ultimately wouldn't do much, the slot is gone and they would have to buy the capacity from nvidia. nvidia is in no position to sell because they are also facing extreme demand. How would it look to nvidia if, while gamers across the world can't get their hands on 3080s, they sold their fab capacity to Chrysler for $$$$?.
I think your simplifications could change the logic here.
Chrysler does not directly buy from TSMC, they buy from i.e. TI, Renesas, Microchip, NXP, ...
Many of those companies do still have fabs, and even if not, they are not competing with Nvidia. They are producing on the old, old fabs, at 40, even 80nm. We would need better numbers on where these microcontrollers are fabbed to be able to tell how this interferes with i.e. Nvidia and Apple on TSMC 5nm.
I'm not even sure it's strictly speaking still true that automotive only uses outdated fabs. Tesla seems to have disrupted the use of low-end chips at least in high end cars, like Jaguar Land Rover.
Change "probably" to "definitely" and I'm with you. Automotive chips need to be a lot more reliable than a PS5 GPU, and that kind of reliability takes time to test and prove. Not to mention that automakers try not to change parts unnecessarily because their economies of scale are only as useful as their ability to use one component across several models and years. If you care little about thermal efficiency and power consumption, and you're not doing extremely abstract computations, there's no reason whatsoever to spend tons of money on a smaller lithography. I was looking into this recently, and the price difference between some of the equipment involved is around two orders of magnitude from the leading edge to the trailing edge.
Not even 80nm. Most stuff in that space is 130nm+, some extremely old, but still produced ICs from early nineties are on 300nm+ for use on equally old automotive parts.
If you look at the concurrent user numbers on Steam, it seems like there's overwhelming engagement in the gaming space right now. I thought the same as you until I looked into it a bit more.
(Also, bitcoin is mined on ASICs nowadays, but I get what you mean.)
I've never heard of other crypto currencies referred to as Bitcoin by anyone other than noobs. It's like calling the Mexican Peso a Dollar. The semantics are important - i.e. for doing something like currency conversions.
Are we noobs here or is this a tech forum where people might reasonably be expected to know the difference between Bitcoin and Ethereum? I'd argue it's the latter.
You can't say that Bitcoin is responsible in a discussion about GPU shortages. It's flat-out wrong and obfuscates the actual problem. It's Ethereum that's mostly responsible for said shortage, and seeing as how Ethereum is moving to proof of stake soon that problem might be alleviated. Bitcoin uses all custom hardware for mining and is not affecting the GPU shortage. The problem with Bitcoin mining is power consumption, not chip contention.
That will be actually fun. Make a company invest in some random crypto coins, presents movements. Just call all of them bitcoin... Argue that at this point it is generic name... Skim your fees from top.
Chip shortages are at a point in the US were government contractors who already have right by law to jump ahead of anyone else in line when ordering and can probably pay whatever price they want are still being told that new shipments won't come for 16 months.
Yes. It’s really a testament to the praise of Tim Cook as a master of operations.
It’s quite a statement that Apple launched four variants of the same product (M1 Air, M1 Pro, M1 iMac, M1 iPad) in the middle of a supply chain apocalypse, all within a few weeks and is both delivering on schedule and even putting the product on sale.
Call your HP rep and try to buy an LCD monitor right now.
10-15 years ago, Cook's level of competency wouldn't have been anything special, but that of competent operations lead.
The industry in the West not only shipped everything to outsourcers, but even forgot how to manage outsourcers as well, being fully reliant on turnkey services.
To be fair, this only works because it is difficult to make money off of protein folding. It is kind of a waste, but not wasteful enough to criticize it.
It's not correct to think that increased prices solves shortages. I work in automotive chip industry. We have many cases where no amount of money could fix the shortage within the next 9 months. Only choices for carmaker is to produce fewer cars or produce the car without the chip that is short (which is not always possible).
There are contracts that might prevent that from happening, just like lead times don't disappear, even if you outbid everyone else (if it was a bidding issue).
Throwing money at a problem to try and solve it can be impossible in various ways.
Yeah, but -- though I haven't run the numbers -- it seems like Jaguar would be better off taking smaller profits while overbidding for the chips rather than just go idle and make something. Even selling at a loss may be preferable to the huge damage to brand from such a discontinuity. (Remember how hard the major internet sites work to avoid downtime.)
It's not just the normal customers, though. A predicted shortage caused a run on chips by people looking for a profit. I've been working on a PCB design for months in which I specifically picked a chip to design around that was newish, in current production, and plentiful at all the major suppliers. I got my first test run done, made a few changes, ordered a second run, which I intended to populate myself, and there were exactly 4 chips left at a single major supplier. Yet, Octopart suddenly lists dozens of new suppliers I've never heard of.
If you have a stockpile of your supplies you'll notice that you can't replenish them long before actually running out and you can therefore increase the price of your product to extract the highest amount from whatever limited volume that you can still produce. Except of course when you are working off an order backlog, but then emergency procurement in an empty market will be even more ruinous.
I wonder if it's possible to retool production lines to keep going without the chips, then add them later. It increases WIP but we saw this in the 80's with computers; they soldered sockets for those chips then only needed to snap them in to complete the machine.
At some price point, you could probably substitute the chips with FPGAs? Though I'm not sure if that would work for cars without requiring some sort of recertification.
The empty shelves will cause cost-push inflation, as people try to buy cars from a smaller available pool (e.g. substitute new cars for used). The price mechanism for cars will respond to a shortage of cars.
Edit: it’s maybe bad luck that this could coincide with a demand-pull inflation pressure, as people ease back into personal transit.
Jaguars And Range Rovers aren't "I need a car" cars. They are optional luxury goods. The lack of new Range Rovers and Jaguars won't keep anyone from getting to work or the store. So I don't think the effect will be nearly as drastic as it would be if the number of Camrys and Hiluxs had to be curtailed.
Wait, so you think if a Veblen good becomes more scarce there will be no price increases around it?
won’t keep anyone from getting to work or the store
I can tell you that luxury vehicles transport plenty of people to work or the store just fine, and if they break down, written off, or are stolen they require replacement just the same.
> It appears that just-in-time economics mean that in the event of a shortage your supply just goes offline. You don't get higher prices, just empty shelves.
If the demand is there, the price increase will find its way to the market, either in the resale market or in alternatives to Jaguar Land Rover.
Exactly. Look at what is happening in the user car market for now. Used cars that people bought a few years ago are appreciating because the new ones are slow to hit the dealerships.
Also cars are interchangeable, if a consumer is not able to buy a model of a luxury car, they can always buy another one that might be higher priced.
Except it takes weeks/months to prep a fab to start making these chips. If the car companies start getting their orders then switch back to JIT manufacturing, then the fabs won’t want to waste these months idle thrashing the manufacturing lines across products.
Raising prices only helps if you can get more supply at a higher price, and you can’t when it takes months to start.
> You don't get higher prices, just empty shelves.
Trying to buy on the used market right now. I promise you we are seeing higher prices because people who had 30k to buy new, are now spending more for the higher quality 1-3 year old used stock.
You have empty shelves, workplaces start going in person again and demand for cars becomes less elastic. Potentially used cars start selling for more than they cost new.
I bought a used car last year for 13k after taxes and fees. 9 months later, I sold to Carvana for 16k (even with a few scratches that would have been $300 to fix, plus a $200 scheduled service coming up in a few weeks). Carvana needs to make a profit, so presumably they're going to mark it up further. It's a crazy world right now.
Carvana is the Internet's BHPH lot. They don't care how much they spend to buy the car because they're gonna sell it for 50% down with 20% APR to someone who can't get financing otherwise.
Used cars went up in value last year. Rental car companies sold their fleet cars into a better market and did not acquire new cars. This left rental car companies short on supply and able to raise rental car prices to compensate as people travel again.
A couple of weeks ago, with seemingly no large events occurring, all rental cars in San Antonio were rented. This week, they are available, but at higher prices than I would normally expect.
I'm even seeing stories about U-Haul trucks all being rented out by tourists because rental cars are unavailable, causing a shortage of rental trucks for movers.
Interestingly enough, Toyota modified their supply chain operating model post-Fukushima. So the solution isn't as coarse as a binary "stockpiles or JIT", but an intelligent assessment of risk and managing that risk granularly. Kaizen at its best.
"Toyota may have pioneered the just-in-time manufacturing strategy but when it comes to chips, its decision to stockpile what have become key components in cars goes back a decade to the Fukushima disaster."
"After the catastrophe severed Toyota’s supply chains on March 11, 2011, the world’s biggest automaker realised the lead-time for semiconductors was way too long to cope with devastating shocks such as natural disasters.
That’s why Toyota came up with a business continuity plan (BCP) that required suppliers to stockpile anywhere from two to six months’ worth of chips for the Japanese carmaker, depending on the time it takes from order to delivery, four sources said."
"“Toyota was, as far as we can tell, the only automaker properly equipped to deal with chip shortages,” said a person familiar with Harman International, which specialises in car audio systems, displays and driver assistance technology."
I was under the impression it was Japanese cars' superior quality/reliability to price ratio that caused them to take over the industry a few decades ago. Just in time might allow for lower prices, but would it also have resulted in the higher quality?
One way to look at it is that JIT is about reducing or eliminating "waste." A quality improvement program is also about reducing waste because reworking a bad part is wasted time and effort compared to making the part correctly in the first place.
So it's not that JIT resulted in higher quality, but an emphasis on quality across the board likely lead to JIT being implemented.
Chips become obsolete very quickly, and car makers create new models every year or two. You are not going to keep a year worth of inventory. Not convinced maintaining more stocks would have bought them much more time.
That's really not true, Car parts are heavily interchangeable. Many parts are used across generations of cars, across different models in a make's lineup, and even across makes.
It takes them 5 to 6 years to design a new model. The chips they use usually come with a guarantee from the manufacturer that they will supply it for the next 15 years.
And I believe the automotive engineers are much happier to keep using old proven parts if there is no reason to replace those. Unlike software, where every new thing will have to be done with something different.
I don’t think chips for cars become obsolete so quickly.
Well, self driving hardware excluded, but the other stuff can probably run very well on 10+ year old designs.
Exactly even those will have same the chips as the regular cars. Just because you have big expensive chip and stuff for self-driving doesn't mean the other systems doesn't use standard off-the-shelve solutions like ABS and so on and on.
People just think the CPU or GPU, but what about power supply, peripherals, busses? All sorts of auxiliary stuff...
I don’t mind patiently waiting for a new Xbox but if Microsoft suddenly doubled the price I’d strongly consider patiently waiting for a PS5 instead.
I’m guessing whatever companies expect they could gain (or even retain) from raising the price in the short-term doesn’t exceed what they expect to lose in the long-term.
I have been looking to buy shocks for my motorcycle for months but the cost was very high and I wasn't sure I could spend the money. But every few days would check out the shocks online. Then I started noticing the shocks I wanted started selling out everywhere. You can not buy them on ebay even. I literally found the last place with a set and bought them. I did so because I noticed that after everywhere sold out the manufacturers website has suddenly increased their MSRP by $50. The place I found them at had them at the old price so I pulled the trigger before they went up.
The model your are using is to simple. Since there is a shortage of new vehicles it pushes up the price of used ones. Then any supply of new vehicles that hasn’t been sold yet goes up. People will keep cars longer since the price of new vehicles has gone up. The drives higher repair rate of vehicles and parts prices will start to rise. Since there is a chip shortages you may not even been able to get certain parts new so it drives up the price of used parts containing the chips.
As people put off buying new cars when cars start becoming more widely available the prices stay higher until the shortage worked out and then prices of used and new car drops. Manufacturers are likely to overshoot the number of new vehicles since the models they are using assume the increased demand. This means once it is worked out a significant drop in prices and you can get vehicles really cheap. See 2008 cash for clunkers where it caused a spike in used cars price temporarily. It also had the effect that leases where cheaper since manufacturers believe they would be able to sale them used at a higher price which was only temporary causing them to lose money.
You do get increased prices for new stock that don’t have existing contracts. If you screw up your estimate of what you need and your suppliers don’t have the capacity to make your parts, now you have a shortage. Now you have to shutdown because you can’t get parts but a manufacturer who did a better job of estimating will be able to charge a higher price. In this case it would be Toyota which didn’t cut their chip orders when the crisis hit. Of course they are also likely to have some shortage of certain vehicles since there will be a shift in demand for their vechiles. So if you own work trucks the value of them will skyrocket right now since most of them in the US are made by the big 3 which don’t have the chips to manufacture them.
Inflation means some things become economically impossible to produce, that is why the rest of the stuff becomes more expensive.
Prices always lag behind because they are the result of all the economic processes that take place, not the cause, and this is just the beginning of the process.
It's worse than that - the auto companies reduced their orders because they predicted covid meant that their sales volume would drop - turns out they were wrong, and now they are bitching and moaning because they can't get the stuff they didn't order
It's fascinating that the response is to close production rather than increase prices.
Those warning of inflation point to events like this as support. But inflation requires that higher producer costs be accepted by consumers.
And for that price transmission mechanism to work, there needs to be supply actually available at the higher price. It appears that just-in-time economics mean that in the event of a shortage your supply just goes offline. You don't get higher prices, just empty shelves.