“No one anticipated that entire business sectors would propel.”

Automation and the increased penetration of EVs are driving up the demand for hardware and, above all, microchips that numerous industries rely on. This is especially true in the automotive industry. What is the situation like in the United States?

Philip Potkowski: It is a serious situation. And it’s not just the lack of microchips, but also lithium, cobalt and other materials needed to produce cars. Currently 70+ ships are waiting to enter key west coast ports e.g., Los Angeles and Long Beach. They are not being unloaded and creating a significant backlog to supply flow in the USA.

Why?

Philip Potkowski: We’re facing a lack of labor force. From unloading boats to truck drivers and factory workers alongside the whole auto value chain, employees are missing. This leads to a lack of raw materials and commodities at automotive factories. One key component are microchips. They are missing in large quantities and have many use cases in a vehicle e.g. from car seats, engine controls to telematics control units for connected vehicle usage.

How bad is it for your customers? Can you back it up with a few numbers?

Han Ko: Approximately 20 percent of passenger vehicle sales of the global car sales volume have been coming from the United States, more or less. U.S. vehicle sales fell for the fifth month in a row in September. That’s the worst Seasonally adjusted annual rate (SAAR) in 2021 so far. This means all of our OEM customers have been largely impacted at forefront sales and are actively finding solutions across different areas to mitigate and minimize the impact from the manifold situation.

Where did this crisis come from?

Han Ko: The automotive and mobility industry has been undergoing an unprecedented disruption – from powertrain disruption to EV, from established players stage to new entrants, from hardware focus to software and digitalization focus and from linear value chain to new business models just to mention a few. Before the ongoing unprecedented disruptions happening, the auto industry has always been more of a linear value chain, where the legacy established players were playing along exhaustive long development cycles. They did more of the hardware focus, let’s say more of like the B2B where manufacturers manufactured cars ordered at tier-1-suppliers who ordered at microchip suppliers – and sell it to the market via established channels, just like the B2B sales to dealer channel then to customer. With the new paradigms kicking in, we now have dynamic value chains. We have the new market entrants coming in, new business models emerging, and on top of it we got the digitalization and software focus going on. Pretty much everything is turned upside down during a pandemic.

With the higher than ever demand of the absolute number of chips going into today’s vehicle and the diverse supply challenges intensified – such as order cutdown, demand forecasting gap, and deprioritized from chip manufacturers – the automotive OEMs are facing an extreme reality.

What options do OEMs have now?

Han Ko: We majorly see three reactions. The first group of OEMs is trimming down their production forecasts and plans. The second group is even launching their vehicles without certain connected features, although they originally announced it. Some plan on retrofitting after they source their microchips with the consumers, and these must be extremely well controlled to maintain their customer relationships. The third group waits and sees. Waiting until the microchip is sourced and postponing the launch of their vehicles.

Could anyone have seen the crisis coming?

Philip Potkowski: From the Automotive side, I don’t believe so, but there is more that comes into it with the global supply chain issues and shortage in labor. The automotive demand curve and sales forecasts anticipated Covid would have a harder impact. I don’t think we could have foreseen it, but I think right now it’s all about how to manage the situation and how to deal with it.

Han Ko: I think no one's immune for such a long last impacting situation. But Toyota’s production maintained relatively well compared to other OEMs – until mid-year. After the tsunami earthquake happened about a decade ago in Japan, Toyota shifted a little bit away from the just-in-time methodology that they were applying to the vehicle production. They knew unprecedented things can happen anytime. If they were not sourced on the high value adding components early enough or have the ways to secure it as soon as the unprecedented events happen, then they knew what the impact of it to the overall vehicle production and the overall corporate offerings would be at the end. That being said, I don't think anyone could have expected the lasting impact COVID-19 would have on the manufacturing industry.

But then there is Tesla — which doesn’t provide regional sales data — who delivered a record-breaking 241,300 electric vehicles worldwide, blowing past expectations. How is that possible?

Han Ko: Tesla’s reliance on the external chip manufacturers or component sourcing to ultimately make their vehicle solution in overall is very much differentiated from other OEM's, right? So when you look at the core components of Tesla vehicles and see their inhouse software capabilities together with overall degree of insourcing versus outsourcing – meaning how much they rely on their suppliers and components – it is a quite different from the traditional legacy OEMs. While Tesla also plays along the automotive value chain as an OEM, and relies on external tier 1 suppliers when it comes to common components and lower value-added parts and modules, they play differently for high value-added components and at the end the core enablers of their vehicle solution. When you look at their high value-added components, let's say batteries, we already know they’re in the battery business. Though they are battery manufacturers, Tesla is also ramping up their partnerships. Take microchips for example. The inhouse capability of Tesla from designing to testing is highly advanced with a high degree inhouse compared to many other OEMs. Tesla’s autonomy and capability once again shined amid the chip shortage as they were able to adapt fast and act agile with substitute alternative chips. This isn’t simple otherwise other OEMs might have done similar – Tesla did it in Tesla way rewriting the software with new firmware and pivoting to new microcontrollers.

What would have to change in the automotive industry so that crisis like this can be better predicted?

Philip Potkowski: The crisis shows the importance of strategic partnerships with suppliers and the dependence on foreign non-U.S. based supply chain. It’s important to bring chip manufacturing companies back into the United States, so that they are on U.S. soil. From an OEM perspective, better forecasting could be worthwhile but sharing the information between collaborators must flow correctly to help foresee these impacts. Therefore, OEMs need to retire obsolete technologies, update ageing information technology systems, and invest in greater data transparency – everything that benefits the complex relationship between multiple tiers of parts suppliers and their vehicle manufacturer customers. In addition, is time for OEMs to rethink and revisit their supply chain and consider to in-source some of these critical components.

Lastly, there are opportunities to reduce the number of microchips needed by reducing complexity in system architectures per vehicle.

Where does umlaut come into play here?

Philip Potkowski: We're looking at all of that both for suppliers and OEMs. The first phase is about creating complete transparency to identify the problem as precisely as possible and getting a solid understanding via a hands-on approach. Then there's the solutioning phase and that is coupled with the reporting. We often come in and we're getting sponsored by the OEMs and Tier 1s to advise on supply chain strategies and/ or recovery of already troubled suppliers. In addition, we have the technical and engineering skills to advice on simplified but more efficient software architectures that require less microchips and thus freeing up units for other cars.

Han Ko: We do offer estimation, demand, forecasting, and technical specification with our engineers. When you design the product, or vehicle, or the features, the services, and specifications – it also comes down to how do you really source the components, right? How do you really source and enable manufacturers of these vehicles combined with all these components to offer your solution? That’s where we help. EV manufacturers, for example, are able to forecast their demand and adequately work with their procurement division and sourcing division to forecast the demand for their own chips at the end.

What are your takeaways from this crisis?

Han Ko: The auto manufacturers or mobility players are in the very urgent need of assessing their supply chain status quo and developing new strategic partnerships with their supply chain partners and with their subsequent suppliers. OEMs do realize the high value-added components such as microchips or batteries – something that they cannot really underlie when it comes to their final product, whether it's a hardware vehicle, or it's a software-enabled service. And now the microchip has been such a critical enabler of the new mobility trends. So therefore, the impact has been tremendous. But at the same time, we see a lot of opportunities and changes happening within the value chains, within the dynamic relationships.

Philip Potkowski: I anticipate that the crisis will last for one more year. With the large microchip manufacturers increasing production and supply bottlenecks clearing up I believe we will be in better shape in one year. Many people thought that Covid could get us into a bigger recession. Whether it was retail, automotive, or whatever industry – no one anticipated that entire business sectors would propel.

Thanks for the interview.