The motor industry wrestles with chips and net zero

The car industry is in flux as companies try to fund the transition of their manufacturing operations to produce green vehicles. Meanwhile, confused consumers are buying fewer cars.

| 5 min read

Consumers are confused about which type of car to buy as regulations change to meet net zero-targets.

Whilst much of the world economy has recovered well from the intense lockdowns of the second quarter of 2020, car output remains well below the level seen in 2018 – and even the lower output figures of 2019.

Many commentators and industry experts put this down to the continuing shortage of microprocessors, which has beset the industry. It cancelled chip orders during the pandemic lockdown slump, only to find when it wanted to crank up output again the digital industries had scooped up the available supplies to meet the surge in demand for more smartphones, pads, laptops and business equipment for remote working. Meanwhile, the new electric cars need more chips per vehicle.

This is not, however, the only reason new car demand has remained weak. The industry in advanced countries is being put through a radical and fast rate of change away from once-popular diesel and petrol vehicles to newer and often more expensive electric cars that do not yet command majority support from the buying public.

Competition mounts

The advent of the electric car has also produced a new challenger to the traditional makers in the form of Tesla, which has affected market shares. Selling high-priced vehicles to the upper end of the market, Tesla has been very successful in designing and producing vehicles for the less price-sensitive buyers, hitting the output of top-end cars from well-known marques.

  • 2% The proportion of electric vehicles in the global car parc

Germany’s new government is looking at ending new petrol and diesel car sales as soon as 2030, bringing forward the date. This is designed to put people off buying these types of vehicles in the meantime, as they worry about future facilities to sell fuel and provide servicing as the electric transition proceeds.

It is important, however, to keep in mind the scale of the switchover envisaged. There are currently more than 1,400 million vehicles in use worldwide. Less than 2% of these are electric. It is a huge task to gradually switch such a large vehicle parc over to a new way of propulsion. It means the businesses that back petrol and diesel technology will have many vehicles to look after for many years to come. There are plenty of older vehicles around, and the transition to electric may encourage more people to run their old vehicles for longer given affordability and other issues with the electric replacements.

The new-vehicle market is now dominated by Chinese production, largely for its home market. China is producing more than 25 million vehicles a year, followed by the US, at around 11 million, and Japan a little under 10 million.

Positive developments in hydrogen

It is widely assumed electric cars will replace diesel and petrol, although the Japanese and Koreans are also backing hydrogen as a possible fuel. Toyota, for example, has been selling some Mirai cars that work on hydrogen, where the advantages in range and cost over the electric challengers are offset by the shortage of places to refuel the hydrogen vehicles so far.

There is more enthusiasm for hydrogen for commercial vehicles. There are operating bus fleets using hydrogen in various cities, usually delivered via electric power through a fuel cell. The UA, Australia, Germany, France, and Brazil are amongst the places that use them. JCB has built a backhoe loader that has a hydrogen engine that burn the fuel in something more like a conventional internal combustion engine. This may offer a way forward for larger powerful machines that need to work hard without the interruptions to recharge them that battery machines need.

A global industry pivot

The next few years will be critical for traditional vehicle makers, as they scramble to design and launch new ranges of net-zero products, as competition builds from new entrants to their markets. Judging the pace of factory closures and removal of facilities for the current dominant diesel and petrol models will also be an important determinant of future profitability, as many people and businesses will remain wedded to their conventional products for many years to come.

The chip shortage is taking time to remedy, though substantial new capacity is now being built. It takes many months to complete and successfully commission a new chip factory, as the world is finding out. Intel, TSMC and Samsung are all building new foundries in the US and TSMC is discussing new capacity in Japan. Meanwhile, shortages stretch well into 2022.

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The motor industry wrestles with chips and net zero

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