The Global Chip Shortage: A Decisive Moment for OEMs

What happens when a tiny piece of equipment, integral to all of the technology we hold dear – from the phone we scroll every day, to the car we drive to the supermarket – becomes as unobtainable as gold dust?

Chips, or semiconductors, control everything from vehicle headlights to gaming consoles. The latest global chip shortage began after the pandemic took hold in 2020, and at its simplest, can be boiled down to an issue of economics: supply and demand. Now, Original Equipment Manufacturers (OEMs) face one major decision; how to deal with it, since they want to produce more vehicles than the supply of chips will allow.

What triggered the global chip shortage?

As the world retreated from life as we knew it due to the pandemic, businesses had to sit up and take stock. The automotive industry was dealt a bad hand, and OEMs had two options:

1. Continue to run their plants at full capacity, risking lower profits if sales drastically dipped, or
2. Run at lower capacity to protect profits and lower forecasts accordingly

Given that footfall to dealerships was plummeting, the auto industry chose option two and chip suppliers reduced their allocation to the industry to match the reduced production.

At the same time, no one foresaw that a large proportion of the world’s population would work almost exclusively from home and require an enormous amount of extra technology – and chips – to do so.

Yet, even in the face of the pandemic, demand was recovering much quicker than anyone could have expected. As a result, OEMs wanted to ramp back up production but have learned that the chip inventory is now committed elsewhere.

But, with limited chips available to power the plethora of features needed to produce new cars, there are now not enough new cars in dealerships to meet upward demand.

What can OEMs do to recover?

One option is to attempt to slow demand for new cars until they manage to obtain the amount of chips required. The easiest way to do this is by reducing marketing efforts, encouraging less people to cross dealership thresholds to purchase cars, of which there isn’t enough stock. They can also reduce their incentives programs, cutting down on spending devoted to encouraging consumers to make purchases.

But there’s another very important way of dealing with this challenge that OEMs can leverage. Manufacturers should look to incorporate the data at their disposal to make better decisions about how to prioritize the chips they have. As more and more cars are connected today, OEMs are able to see which functions or features of cars have the highest usage – whether it’s heated seats, remote start or anything else – and match this with customer preferences.

The features left gathering dust can be strategically removed, allowing OEMs to prioritize the features their customers like, while maximizing chip usage in the units produced. This is already happening with the likes of BMW removing touchscreen functionality, and Mercedes saying a temporary goodbye to certain LED lights. Equally, OEMs can look at delaying production of certain models with more features (read: chips) to stretch the chip inventory.

Overcoming the global chip shortage

The ramifications of this decision are going to be felt for many years to come, but one thing’s for certain: OEMs are working in an era of unpredictability, and decision-making is in constant flux. It’s crucial that OEMs leverage all accessible data to achieve the best outcome possible.

Read Treasure Data’s latest report, ‘Better Decisions in the age of unpredictability’, here. To learn more about how Treasure Data CDP is reinventing the car buying experience, visit our Automotive Solutions page.