Tesla/Samsung: plans to secure chip supply could extend delivery times
Tesla is dealing with the global shortage of automotive semiconductors in characteristically head-on style. The carmaker is considering both advance payments to chipmakers and a plant of its own. It has the cash. But it may not have factored in the time.
The company’s proposal to secure chip supply with prepayment would offer chipmakers a predictable revenue stream. Yet such long-term contracts are not always welcome. Profitability depends on chipmakers being able to benefit from price upswings by allocating sales to the companies and sectors that offer the highest margins at that point in time.
The industry’s cyclical nature is down to the fact that output is constrained. Sourcing raw materials and producing chips takes at least three months. The price of production is steep. It costs up to $20bn to built a new fabrication line and years to add capacity.
Chipmaking also relies on an ecosystem built over decades. Samsung, one of the companies that Tesla sources chips from, started its semiconductor business in 1974. It has hundreds of suppliers located close to its production lines in South Korea.
This is why spending has remained consistently high. Of Samsung’s total capital expenditure of $34.5bn last year, chips alone accounted for $30bn. It spent $19bn on research and development last year, more than 12 times that of Tesla.
Should Tesla choose to buy and operate its own plant, it must also factor in the extra time and money required for the sophisticated chips that it requires.
Automotive chips have long been a less profitable business compared with other system semiconductors. Unlike chips used in smartphones, automotive chips require cutting edge technology while also being rugged. The chips need to function under extreme temperatures, in a range from 100c to -70c. They must be able to endure humidity, repeated impact and survive collisions. They also need a longer lifespan, at least 10 years, than most chips in use. Any defects carry serious safety implications. This means that they need to undergo multiple rounds of strict quality control, all of which adds costs.
Yet carmakers’ chips fetch lower average prices than other sectors, including servers and smartphones. The gap suggests there is no quick fix for Tesla. Businesses and consumers will need to adapt to longer waiting times for their next electric vehicle.
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