ACV facts & figures
Chips are in everything these days, not just computers. They help control your games console and smart home—even kitchen gadgets require semiconductor chips to function. In the past two years, we have seen how the car industry has struggled to keep up with demand. With everyone saving money by not being able to travel and staying at home, a lot of customers chose to buy their next car towards the end of 2020 and 2021. As a result, semiconductor demand and use are now at an all-time high, so the White House is stepping in to help.
The latest CHIPS and Science Act from the Biden administration has recently been put into law and introduces a wave of changes for the auto industry.
What are the CHIPS and Science Acts?
The Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act is an injection of $52.7bn worth of subsidies to support this movement of chip production. With the main chip suppliers coming from the Asian market, the Biden administration has worked to transition the global footprint of chip production to the US1.
Breaking this down, the Act will support funding and tax credits for semiconductor companies to build manufacturing sites and invest locally in the US. This also includes research and design facilities and a $2 billion fund allocated for the more traditional chips that automakers and their suppliers still use today.1 The bill adds a 25% tax credit for investing in chip manufacturing completed by 2026.2
Why Did the Government Need to Create Legislation?
Commerce Secretary Gina Raimondo told TIME magazine before the act was passed that, “Chips are the most essential item in modern industrial equipment, medical technology, and every piece of military equipment.” She added, “We are overly dependent on other countries for chips”.3
Dealer inventory was heavily impacted, reduced to just a third of what it had been before the pandemic, based on research from J.D. Power and LMC Automotive. Plus, cars are selling for all-time highs above MSRP and are being snapped up quicker by eager customers.
Waiting times at dealers can now exceed a year, with EVs and rare larger engine cars taking even longer.4 Mercedes is at the forefront of this impact as V8-powered cars are at risk, including its AMG models, which are currently not being sold to the US market due to supply chain and various quality issues.4
Issues With Current Semiconductor Chip Shortage
Semiconductor chips used to be bought for pennies in the 1970s and were rarely used in cars.3 Nowadays, they are one of the most common components. With sensors, control modules, infotainment, and safety features being integral parts of the vehicle, chips are everywhere.
For example, a Porsche Taycan can house up to 8,000 chips to control and manage the power, safety, and infotainment systems.3 With the Asian market still struggling to keep up with demand, not just for the Automotive industry, something had to be done. EVs are only on the uptrend; with more talks of autonomous vehicles and connectivity features, the chip usage is only estimated to continue to grow.
It also boils down to the complicated process of producing chips. With billions needed for chip production lines, which take years to complete, the CHIPS and Science Act will not necessarily be an overnight solution. Manufacturing semiconductors takes a lot of skill and special equipment, with fabrication capacity at a shortfall too. These factors affect the production of chips, with the end product not being the only limiting factor in the industry.
Travis Kelly, CEO of the Arizona-based Isola Group, says, “Every chip needs to be embedded in one of those ubiquitous green printed circuit boards in order to work, similar to how a brain needs a body”. This means specialized laminate, copper foil, and fiberglass yarn are in demand, with a stiffened raw material shortage affecting production sites that are still able to operate.3
Some carmakers have reduced their available options for new vehicles to cope with the demand. They have also limited new developments as they wait to see what the effects on chip production are. This means fewer innovative ideas are coming out of the OEMs. And with the latest news of California banning combustion cars starting in 2035, new solutions need to come in fast.6
How Will This Act Help the Auto Industry
Reducing the reliance on overseas markets for chips will be a major boost for the US auto industry and dealers selling cars.3 With a larger pool of suppliers to choose from, the effects of chip shortages will eventually reduce. Supply and demand over the next few years under the CHIPS and Science Act from the Biden administration will balance out. As a result, the turnaround time for vehicle production should reduce, thereby making customers, dealers, and automakers much happier.
Competitive car makers will now be able to innovate and produce the safest, most refined, and most luxurious cars for the masses. With the CHIPS Act boosting production, in a few years, a host of new vehicles will be released with the latest features with no concern of chip shortages for their suppliers.
It also creates a highly skilled, highly paid workforce domestically. The promise of Intel’s latest announcement includes a $20 billion semiconductor manufacturing plant located in Ohio.1 The company aims for an average annual salary of $135,000 for its estimated 3,000-strong workforce once the project is complete.
Companies will hopefully be concentrating on the US to set up chip production locations to ease demand across all industries. The US has seen global semiconductor manufacturing capacity dropping to 12% today, where it was almost 40% in 1990.1
Conclusion
The latest CHIPS and Science Act recently being put into law hands carmakers a lifeline to the supply chain shortages we have experienced over the past two years. The $50bn+ injection aims to bring local production, research, and development to the US for semiconductors and will help the auto industry in many ways. The chip sourcing process will be made a lot easier; if the part is produced locally, delivery times and lean production methods can improve, and customers will have a shorter wait time as their vehicle is produced.
No longer will car makers threaten to reduce the number of features in their cars due to the chip shortage. More innovative ideas can be put into the real world if there are no limits on chip usage throughout the vehicles. With exciting features to entertain occupants, providing better safety and efficiency can all be implemented in the next model cycle.
The complex nature of chip production means we may not see the effects of this legislation for a few years, but the demand for safer, cleaner, and refined vehicles is only rising. With long waiting times and a lack of inventory for customers after the effects of the pandemic, this can only be a good thing for the car industry.
Stock Your Dealership With ACV
The chip shortage now has some hope, but it will take years to see the benefits. The used car market is still hot, and prices have recently hit all-time highs. In times of need, dealerships seek help in coping with the short supply. As used car inventory is limited across the US, we know trade-ins aren’t the only way to stock used cars. Dealers can buy auction cars online.
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Sources
1. "The CHIPS Act: What it means for the semiconductor ecosystem," [Online]. Available: https://www.pwc.com/us/en/industries/tmt/library/chips-act.html.
2. "ALL IN: CHIPS ACT PROVIDES INCENTIVES FOR SEMICONDUCTOR INVESTMENT," [Online]. Available: https://us.eversheds-sutherland.com/mobile/NewsCommentary/Legal-Alerts/252944/All-In-CHIPS-Act-provides-incentives-for-semiconductor-investment#:~:text=The%20CHIPS%20Act%20adds%20new,of%20an%20advanced%20manufacturing%20facility.&text=(3)%20which%20is%20i.
3. N. POPLI, "Having Trouble Buying a New Car Or PlayStation 5? Congress Hopes the CHIPS Act Could Help," 27 July 2022. [Online]. Available: https://time.com/6200728/chips-act-congress-supply-chain/.
4. "Vehicle Inventory Shortages Constrain August Sales Pace as Average Transaction Prices Reach All-Time High," 24 August 2022. [Online]. Available: https://www.jdpower.com/business/press-releases/jd-power-lmc-automotive-forecast-august-2022.
5. P. A. Eisenstein, "Supply Problems Will Keep Most Mercedes V8s Out Of U.S. In 2022," 4 October 2021. [Online]. Available: https://www.forbes.com/wheels/news/mercedes-not-shipping-v8s-for-2022/.
6. L. F. a. B. P. Coral Davenport, "California to Ban the Sale of New Gasoline Cars," 24 August 2022. [Online]. Available: https://www.nytimes.com/2022/08/24/climate/california-gas-cars-emissions.html.
7. "Intel to invest $20bn in new Ohio chipmaking complex," [Online]. Available: https://www.ft.com/content/86480e82-e469-4f26-b2eb-ebe922dfbd2b.
