How Tesla Is Overcoming The Global Chip Shortage

A global chip shortage is continuing to wreak havoc up and down supply chains in a diverse array of industries across the world. As unprecedented amounts of work, life, shopping, and socializing went digital as the spread of the novel coronavirus drove everyone inside, the demand for electronics, and the computer chips they contain, skyrocketed. The overnight increase in demand, compounded by then-President Donald Trump’s trade war with China, has caused a major headache for a huge swath of economic sectors as more and more products become “smart” and therefore reliant on the severely overloaded semi-conductor industry.

One of the hardest-hit sectors is the automotive industry at a time when demand for new cars is historically high. While a modern car can contain well over 3,000 chips in its production, the automotive industry makes up just a fraction of overall chip demand. Because of car companies’ relatively low purchasing power, semiconductors are prioritizing bigger fish like smartphones, video games, and other consumer electronics, leaving the automotive industry high and dry.

As a consequence, some of the United States’ biggest car manufacturers are taking major hits to their bottom lines when their profits should be sky-high thanks to heavy demand for new cars. Ford, the country’s second-largest automaker by volume, saw its profits cut in half in the last quarter. General Motors, another one of the USA’s Big Three automakers, is currently halting the assembly lines at a number of plants that build pickup trucks. The plants had only been back online for a matter of weeks following a July shutdown which was also caused by the chip shortage. BMW, too, has halted their assembly lines and cut production by tens of thousands of cars. And Vox reports that these shutdowns are just the beginning of what will continue to be a very painful couple of years for automakers. The Economist reports that the industry as a whole is projected to produce a whopping 5 million fewer cars this year thanks to the dearth of available chips, which are now an essential component to any car worth its price tag.

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If regular old gas guzzlers are suffering from the chip shortage, what is in store for electric cars and luxury vehicles that have hung their car on being chip-filled “smart” vehicles? According to chief financial officer and founder Elon Musk, Tesla has been trying to work around the issue by rewriting the software of its electric vehicles to support alternative chips  which would allow the company to circumvent the normal, overloaded semiconductors.

“We were able to substitute alternative chips, and then write the firmware in a matter of weeks,” Musk said in an earnings call late last month. “It’s not just a matter of swapping out a chip; you also have to rewrite the software.” This innovative solution has allowed Tesla to keep its production lines running and avoid the shutdowns that have plagued other major automakers. In the same quarter that Ford’s profits were halved, Tesla generated $11.9 billion in revenue and raked in $1.1 billion in pure profit while churning out more than 200,000 vehicles over the last three months.

Despite this runaway success in the face of automotive industry adversity, Musk said that the company’s future growth will remain dependent on a lasting solution to the chip shortage. Software rewrites aside, Tesla still relies on a wide variety of chips to produce their vehicles. “The global chip shortage situation remains quite serious,” he said. “For the rest of this year, our growth rate will be determined by the slowest part in our supply chain.”

As a result, prices on both new and used cars are through the roof, and they will not be dropping any time soon. Despite this, the squeeze is still on for automakers. It’s really the dealers that are winning out in the price surge.

By Haley Zaremba for Oilprice.com

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