Europe to ramp up chip production as global crisis puts squeeze on its vital auto sector

April 29, 2021, 5:10 PM UTC

With the acute global semiconductor shortage getting worse, Europe’s push to reduce its dependency on imported chips is gaining fresh urgency and support from manufacturers. 

Volkswagen Group, the world’s second-largest carmaker after Toyota, on Thursday backed efforts by policymakers in Brussels, urging more self-reliance by bringing onshore assembly of nanometer-size transistor chips currently mass-produced in countries such as Taiwan. 

“We have to set up a more resilient supply chain, [one] not only coming from Asia or the U.S., that’s for sure,” said Nikolai Ardey, head of group innovation at Volkswagen, during an event. “We have to step-by-step develop our own.”

Hours earlier, German peer BMW confirmed for the first time it was affected by the shortage despite assurances its orders had been submitted in time, while U.S. carmaker Ford shocked investors with news that vehicle production for the second quarter would be half of what it initially planned because of missing electronic parts.

Ford hit hard

Ford enjoyed one of its strongest performances in years during the first quarter, but the stock tanked 9% after it warned that production will drop by about 1.1 million units this year due to the chip shortage, costing it $2.5 billion. This means that as much as 87% of its forecast of $5.5 billion to $6.5 billion in annual adjusted operating profits for 2021 were already booked in the first quarter and are now in the past.

Equity analysts at investment bank Evercore ISI called the new guidance “ALL headwinds,” warning in a research note that consensus earnings estimates might need to be slashed by as much as 30%.

Sagging sentiment, it warned, could also hit suppliers, who may end up as collateral damage through no fault of their own.

Cue German chemicals giant BASF, which warned on Thursday that the chip shortage was causing uncertainty for its auto-related revenue for products such as car paint pigments and engine catalysts. 

“This is one of the question marks, where we say we do not know how production levels in the car industry will be in the second half,” said CEO Martin Brudermüller, adding that the semiconductor issue may last longer into 2021.

Joining forces

EU Industries Commissioner Thierry Breton said the auto industry’s chip crisis was proof that production needs to be brought onshore. 

“We want to bring the industry and member states together within the framework of a European semiconductor alliance to kick off the necessary investments,” he told German daily Frankfurter Allgemeine Zeitung in comments published this week. He added that foreign partners were welcome as long as Europe remained “in the driver’s seat.”

Breton is due to meet with Intel CEO Pat Gelsinger in Brussels on Friday. Breton is also scheduled to speak virtually with Maria Merced, president of Taiwan Semiconductor Manufacturing Company (TSMC) Europe.

The bloc feels its share of the 440 billion euro ($533 billion) global semiconductor market is well below its economic standing at just 10% of the whole. It aims to deploy as much as 145 billion euros over the next two to three years to install a full semiconductor value chain. 

In a joint declaration signed in December, nearly two dozen EU member states pledged to coordinate their efforts and pool investments to design and manufacture next-generation low-power processors, whose technology can, over time, be developed to produce nodes just 2 nanometers in length.

BASF cautioned, however, that a lack of capacity wasn’t the only reason why automakers have been so badly affected, as there were also economic reasons at play.

“Automotive chips have lower margins than many other applications,” Brudermüller said. “The producers have also dedicated their capacity to other higher-margin production, so it’s probably not coming back quickly.”

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