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Whether the dark underworld of pharmaceutical companies has stealthily inserted tracking chips into our bodies through the Covid-19 vaccine is certainly a matter of grave concern for believers of absurd conspiracy theories; in the real world, the chip concern is different. Global automobile and electronic companies are in the throes of an actual chip crisis that is causing them crippling losses each day the shortage continues. Ironically, this very real chip concern has also been triggered by the pandemic.

Just about everything electronic produced in the world uses microchips. As more products become tech-enabled, demand for semi-conductor chips has also soared. When the pandemic hit, disruptions in supply chain and logistics made it difficult for chip suppliers to maintain production. This at a time when demand for consumer electronics began to grow as more people were staying at home resulting in an outstripping of demand from supply.

In many industries like automobile manufacturing, the pandemic exposed the vulnerabilities of the Just-in-Time model, pioneered first by Japanese automaker Toyota and which slowly but surely was adopted by other automakers (and a wide variety of industries) around the world for its cost effectiveness and leanness. The JIT basically enables companies to order only as many inputs as the demand of good requires which minimizes the need to stockpile. It cuts costs and allow companies to explore more products. But this also requires very close forecasting of demand which makes companies vulnerable to large changes in demand and/or supply of inputs.

When covid-19 hit, orders from automakers for chips became to deplete. When demand returned—for cars automakers and other electronic goods—chips became hot commodity but supply was nowhere to be found due to long lead times in production. Chip makers now believe big auto giants need to provide long-term order commitments. Ordering at the last minute when demand fluctuates does no good for chip manufacturers. No doubt, with technology moving toward self-driving and electric cars, the industry would need more chips and then some, and will need to build key component stocks by departing from the JIT.

Funnily enough, Toyota began to steer away from the JIT model by keeping higher inventory levels of vital component and parts including chips which seems to have paid off for the company compared to rivals. The disruption to Toyota, due to the chip shortage, as a result has been far less pronounced and production has remained shielded.

While market watchers believed the chip crisis would soon start to simmer down as production ramps up, it seems that the crisis will loom for a few more months. It is no surprise that most of the chip supply comes from Asia feeding demand across the west; a lot of it from Taiwan which is in the midst of a covid-19 outbreak. Factories in Taiwan are being shut down for production which revives the chip crisis long before things could stabilize.

Here at home, Kia and Hyundai have delayed deliveries for up to six months due to chip shortage while the rise in production cost due to supply disruptions is driving automakers to increase prices: case in point- the recent hike in price of DFSK 580 Pro. More will come if the crisis persists. But wherever the chip(s) may fall, manufacturing around the world needs to depart just-in-time to catch up.


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