Could the chip shortage delay the "Year of the EV"?

The chip shortage situation seems to be getting worse, especially with the recent news of the fire at the Renesas fab in Japan, and the drought issues that could potentially impact production at TSMC in Taiwan.

Looking at the impact of the chip shortage on the automotive sector, it's important to remember that the semiconductor content in modern automobiles is significant, and if chip supplies get disrupted, that could cause the automakers to look at production slowdowns or outright stoppages.

However, the real problem that the automakers will face very soon is one of overhead. If the chip supply keeps dwindling, that may force the OEMs to look at layoffs. By summer, we could see entire product lines stopping altogether for extended periods and new vehicle launches delayed. This could especially impact automakers' plans for upcoming launches of electric vehicles, or EVs.

This year was set to be a critical point for all types of manufacturers looking to establish themselves in the EV market. The calendar year calls for many new EV models to be released, including models from traditional players, like the BMW i4, Ford F-150 Electric, GMC Hummer EV, Hyundai Ioniq 5, Mercedes EQS, Nissan Ariya, and Volvo XC40 Recharge. Plus new model launches from niche players like the Lotus Evija, or EV startups like the Lordstown Endurance, Lucid Air, Rivian R1T and R1S, Polestar 2, and others.

But in the wake of a substantial chip shortage, automakers hoping to get a foothold in the EV market in 2021 may have to push out those aspirations to 2022. At a minimum, if the chip shortage continues unabated, this would likely delay product launches. The worst-case scenario is that the shortages could jam up the production lines to the point where the automakers would have to “relaunch” these products at a later time once chip supply stabilizes or rebounds.

Of course, the issue is more complicated for traditional OEMs whose bread-and-butter is producing gas-powered vehicles. Gas vehicles are still cheaper for automakers to manufacture, and easier to get for consumers. A new, $100,000 EV that probably has a limited market, but that requires more semiconductors and financial investment, would be taking resources away from flagship models that are proven to sell in high numbers and that arguably have healthier profit margins.

So the OEM has to weigh where to put its money. Do they put it in a high-risk EV launch? Or do they stick to their cash cows and keep that cash flow going? And remember that they're making this decision during a very turbulent time in the supply chain. It seems fair to expect that the electric vehicle launches would take a backseat to the gasoline vehicles.

Now apply this reasoning across the board to all the EVs that are supposed to launch this year. A startup EV company like Rivian doesn’t have to worry about taking away from one product line to give to the other. They’re small and only have one or two products. But the traditional OEMs have to consider impacts across their entire product portfolio and be very careful about where they devote their resources.

It's important to add that the supply chain issues are affecting gas-powered cars, too, at the production and retail levels. We can expect to see prices continue to rise for trucks and SUVs – not because market demand has changed, but now that production is slowing or stopped, inventory at the retail level is getting smaller. This has created a bidding war for potential new buyers. And it also is impacting the used car market, since buyers who are finding that there are no new trucks and SUVs to buy are turning to the used market instead.

Looking ahead to future vehicle launches, for both EVs and gas vehicles, the long-term prospects are going to depend on the chip supply. If the chip crisis worsens, you could see automotive take a big hit, with lower production, lower sales, higher prices, and weaker quarterly or annual results throughout the year. If the storm blows over soon, automotive could bounce back, and we could see EVs have their big year – although that year may be 2022, instead of 2021.