Due to global semiconductor shortages and supply disruptions, longer waiting times and higher prices have become a normal part of buying new cars this year.

There are early signs that this shortage is easing as major suppliers’ inventories increase. However, the industry that produces semiconductors used in today’s cars has undergone a fundamental change, which means that it is too early to say that the worst is over.

The longer-lasting problem is that most global automotive chip companies have evolved into “fabless” companies-they design chips and then outsource manufacturing (or manufacturing). Since these companies do not have their own production facilities, they rely on chip manufacturers such as TSMC and Samsung.

These two companies account for about 80% of the global foundry chip manufacturing and almost all of the advanced chip manufacturing market share, and have been operating at full capacity for a long time. Automakers’ chip inventories are at historically low levels, which means that demand should remain high.

At the same time, modern cars use more chips than ever before. The electronic system controls everything from opening suitcases to cutting-edge infotainment systems.

Additional autonomous driving functions are increasing the number of chips in cars. An electric car uses about 2,000 chips on average, which is twice the average gasoline chip. For example, the number of electronic components in the Tesla Model 3 is more than three times that of traditional models. Tesla’s fully autonomous driving chip is a central control unit manufactured by Samsung and used in all its new models. It is a key part of its technological advantage over rival electric car manufacturers.

So far, most of the chips in the automotive industry have used older technologies. This means that automakers are not competing for the same chips with other industries such as smartphones and telecommunications.

But as cars become more and more high-tech, automakers are beginning to use advanced chips for smartphones, Internet servers, and 5G devices. As smarter and more self-driving cars become more common on the road, more advanced chips will be needed in many cases.

Despite the demand, chip makers such as Samsung and TSMC are still reluctant to expand production capacity. High cost. For example, Samsung’s new plant in Texas will cost $17 billion. It takes several years to establish and recover the investment. The chip price is negotiated once a year, and it is difficult to raise the price in a rapidly changing market environment. 40% of the huge profits of TSMC and Samsung’s chip division depend on using existing factories to operate at full capacity.

Car chips are not the favorite of chip manufacturers either. They are difficult to design and manufacture, and need to pass strict stress tests to ensure safety, because any defect may cause a car accident. It takes about five years to design and produce them from scratch, while the chips used in consumer electronics products take less than a year. As cars now need to mix old and high-end chips, this fact is even more complicated. Due to the meager operating margins of automakers, chip pricing has almost no room for maneuver.

Since most of Samsung’s production capacity is used for its own products, TSMC is the only viable option for most companies seeking advanced chips. But TSMC has been overwhelmed by 53% of the foundry chip manufacturing market share. After the record number of Chinese warplanes invaded near Taiwan this year, people are also worried that it may cause damage and political risks.

Despite record revenue, Samsung’s stock price is still down 16% from its January high. To a certain extent, this reflects the expectation that after record years, periods of oversupply may depress prices and profits. During the oversupply of chips in 2001 and 2008, Samsung Group’s operating profit margin dropped to single digits.

But future recessions may become more unpredictable. The world has felt the disturbing consequences of chip interruption, and has no intention of restarting it. Car companies are hoarding goods. The border closure driven by Omicron has made the already tight supply situation even worse.

Automakers with local supply chains will gain an advantage. For example, Tesla recently moved to Austin, just a half-hour drive from Samsung’s new chip factory in Taylor. This should reduce supply chain issues, speed up updates, and strengthen engineering collaboration.

Automakers that rely on just-in-time manufacturing and global suppliers to reduce component costs need major overhauls. Management decisions in the coming year will determine the market share in five years.

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