By Greg Gao

Supply chain disruptions caused by the Covid-19 lockdown and shortages have hurt automotive manufacturers since 2021. Many car manufacturers have started adjusting their supply chain management strategies, moving from “just-in-time” low inventory to “just-in-case” operation to avoid running out of component stock, according to a JW Insights analyst article.

Supply chain is a lifeblood for car companies. The absence of one link can lead to the failure of vehicles off the production line. Shen Hui, chairman and CEO of WM Motor(威马汽车), a Chinese EV startup, said in a recent social media post that if the supply chain is only 90% ready, it is actually close to 0%. Without a chip, or a screw, a car cannot roll off the production line. He emphasized that automakers must avoid the zero inventory of parts. The lower the inventory, the more likely car manufacturers to experience production line stoppages. 

It is time to change JIT (just-in-time inventory) to JIC (just-in-case operation). In terms of supply chain system building, cluster supply should be appropriately converted into multiple supply chain models, he added.

Since the second half of last year, several major traditional car companies, including Volkswagen, Foton, and General Motors, have begun to re-examine the supply chain issues. Many car companies are calling for reshaping and adjusting the supply chain. They and their upstream suppliers believe that as uncertainty increases, supply chain imbalances may become the new normal in the future. 

Car manufacturers around the globe lost over $300 billion in revenue in 2021, and Q4 was the worst quarter in the last decade, with car makers losing out on over $186 billion in sales. 70% of major global auto manufacturers have announced line stoppages in the previous year, with 45% of them specifically citing supply chain issues. Meanwhile, semiconductor stock levels dropped 43% in the last two years to reach the lowest point in over a decade, according to European semiconductor distributor Avnet Silica.

JW Insights learned from people in the industry that the traditional automotive chain model, the JIT (just-in-time) model pursued by car factory, it is usually planned from the car manufacturers to Tier 1 suppliers to Tier 2 suppliers, and smaller component suppliers. Under normal circumstances, the car makers will give a lead time of 6 months plus an additional 7-15 days.

“On the surface, it seems that the car manufacturers transferred the risk to all levels of suppliers. However, once when there is a black swan event like Covid 19, any shortage of Tier 1 supplier’s parts will eventually be transmitted to the car companies, which will have an impact on the production of the vehicle.” Zeng Guangming, deputy general manager of local chip maker Xiaohua Semiconductor(小华半导体), pointed out in an interview with JW Insights.

The rollout of 5G, electrification of the vehicle, and demand for data centers have all contributed to increasing demand for semiconductors from the auto industry. Establishing a safe automobile chips supply chain is crucial to the industry. The shortage of chips in the past two years has further highlighted the urgency of automobile chip localization in China. China’s automobile manufacturers must carry out in-depth cooperation with domestic chip manufacturers as soon as possible, the JW Insights report concluded.