This is a fatal mistake that the Automotive (and many, many others) who live, breath and preach JIT/6sigma/lean have made. The methodology simply doesn't work when the lead time for design-to-delivery is 18 months and you need your orders in and volumes committed in order to hope to see them on the market next year.

Fabs do not work on jit/lean order principle - if you up your order volume, you can't simply scale it up on demand the next month - even if your design is done and taped out. Fabs aren't sitting around idly waiting for orders nor are they overprovisioned "just in case".

An example of this would be AMD and TSMC. AMD books capacity 3 years in advance for which TSMC designs the entire fabrication facility around, orders the lithography machines (which have a 12 month lead time and can't scale up on a dime) and assembles and staffs those same facilities to produce the wafers. It's not a general-purpose fab as most think. There are rumors that Apple booked m1 fab capacity (on TSMC 5nm) in 2018. For the chip inside a car for example, it is built on much older process, and when 5 of your biggest customers "JIT" reduce their order volume for the next 3 months you simply put those staff elsewhere (probably on the 6x higher margin cutting edge fab you just got booked and prepaid for) since anyone else who might want that process and capacity has already has their orders being produced.

Due to the sheer capital requirements (and consequent commitments required) and multi-year forecasting involved in simply getting what you think you'll need, let alone having extra, it's not hard to see why a small increase in global demand would cause a dramatic shortage. JIT works in Automotive supply chain where you can request that your bearings get made 10 days before they're delivered to the factory, but not when there is an 18 month latency on "scale up" request/response.

It's applying JIT principles to inherently non-JIT supply chains.

You can apply the same principles, but you have to adjust the time coefficients to fit the realities of the supplier.

I guess if you account T = 18 months, JIT can still apply.

This is correct. Every type of suppler has different adjustment time based on their own systems. Tooling & upfront design is actually common in a lot of industries, chips just have extreme tooling & upfront design requirements.

Trust is the thing that keeps the entire global economy going. Sure, it is attenuated at many points and has to be back-stopped at others, but all division of labor is expression of trust in the work and promises of others.

Now, the whole world is trying to get TSMC to invest in other locales in advance of Chinese invasion of Taiwan at the same time that NATO is funneling arms and personnel to Ukraine ahead of Russian invasion. Work isn't getting done on expected timelines because of unprecedented disruption caused by responses to covid.

Meanwhile, down at the bottom of the pile, when airlines cancel my flights for unprecedented problems, I wait 3 hours on hold because they don't have enough people working support.

All this to say that, yes, the bullwhip is going to be horrible, but so is not being able to perform your function in the economy because your required inputs are unobtainable. There's no graceful path for a system with so much volatility. Hopefully we can all stomach the creative destruction.

> These types of solutions (JIT or Lean) are designed to prevent the bullwhip effect and ensure that suppliers have predictable and constant demand, rather than feast or famine.

If that were true, they would have ensured the chip manufacturers had constant demand, rather than a famine period followed by a huge feast.

The truth is that just in time is being used as a cost minimization procedure, by offloading the demand risks into the suppliers and increasing any feast or famine event. That maximizes profits as long as there isn't an emergency, what seems to be the favorite administration goal of the current age.

If there is an emergency, all the large companies can simply go to the government for free money, why would they care about doing anything but absolute profit maximization.

One way to deal with the bullwhip effect is to build robust futures markets around the underlying components. This improves the market two ways. 1) It allows both suppliers and demanders to hedge their exposure in the futures market, which gives them more confidence to plan the rest of their business without uncertainty. 2) It enables professional speculators to engage in price discovery and telegraph credible signals to the rest of the market about the long-term trajectory of supply and demand.

>> One way to deal with the bullwhip effect is to build robust futures markets around the underlying components.

These chips are not fungible commodities. In the automotive space chips are selected based on a number of things including feature set - how many CAN interfaces does it have, how many GPIO, how many PWM, what kind of brown-out handling, what voltage range, thermal rating, etc... Software is then written where a portion of the code is specific to that chip. There are cases where an OEM get really good pricing on a bigger (overkill) chip and helps a supplier get those at good prices too, but usually they just beat you over the head for the lowest cost. Even if everyone adopted a few larger parts and used just those, they're still usually made by a single chip company.

I think in time chips should be fungible commodities. A lot of components, such as DRAM, NAND are fungible. As we move towards more open source tech, like RISC-V, for microcontrollers, maybe many of them become completely fungible as well. Especially if there isn't an infinite variety of them -- I guess the completely custom RISC-V chips won't be fungible, but if one can use an off-the-shelf standardized module, those could be.

> off-the-shelf standardized module

This doesn't exist now for the same reasons it probably wouldn't work in the future: You can save significant amounts of money if you cut the pieces out of the "standard" that you don't actually need. Chips are cheap to make, in bulk. It's almost entirely a fixed cost/area. That's the magic. So, it's almost always cheaper to make a custom chip than to pay for some bloated standard containing large sections that will never see power, especially when chips are something like 40% of the BOM, for modern cars.

>... especially when chips are something like 40% of the BOM, for modern cars.

No knowledge of the automotive industry, but that sounds impossibly high.

Sorry, that is high! Somewhere around 20% for low power electronics (not just chips), according to https://www.statista.com/statistics/1248308/share-of-automot...

Aren't these sort of year-out agreements basically futures contracts? Especially the ones that don't allow you to back out. I know at least in the business I'm involved in, the deals are tradeable in the same way futures contracts are.

2024 cars are going to be so cheap, imagine if that's the cause/effect that made EV cars finally affordable.

I think that the components being hoarded have little effect on the final car price, but are critical to the car working -- e.g. required but not sufficient. These are like $0.50 microcontrollers or similar.

I think there isn't a bullwhip effect on batteries, which is the main cost associated with TVs.

Used car prices probably will collapse, though.

Used car lenders will collapse.

The 72 month loan for a $50,000, 2019 F-250 will be completely underwater, and the car owners may decide to literally send the cars “underwater” to get out of the loans.

This doesn't sound right? I thought the value of the collateral had no bearing on the loan, except as a condition for the lender to call the loan if the collateral loses too much value?

If a person owes $40k on an asset worth $30k, why would they keep paying?

Based on what happened in places like California with mortgages, they will default one way or another.

Defaulting has a cost though. If you default on your car loan, how likely is it that you're getting a loan for the next car? What kind of interest rate are you going to get?

Depends. You can get a mortgage with a modest premium a year or two out of Chapter 13 bankruptcy.

In Europe at least, they'd still be on the hook for the rest.

This seems trite, but the reason EVs aren’t affordable now is that not enough are being produced to satisfy demand. The actual cell cost (not price) is crazy low, like under $80/kWh for the LFP type cells in the base Model 3. But the price goes higher because demand is so incredibly high, even though Tesla is making 1 million EVs per year and growing rapidly year on year.

Used EVs used to be pretty dang affordable already (I got a Leaf and a Volt for under $10k each) before all used cars became more expensive and the price of gasoline increased, increasing the demand for EVs.

It’s just about scaling up production.

China is turning out so many EV cars, dealers are buying back old one's to keep the price up. This is what BMW did (and possibly other German car manufacturers), in the late 80's/90's.

Another thing I see China doing, is pegging their currency to the dollar, now when the UK did this to the stronger German Deutsche Mark, the UK under Lord Norman Lamont crashed out of the Exchange Rate Mechanism and the UK saw interest rates hit 12/13% so I wonder if this chip shortage has more to it other than investment reasons only?

the other side of this cyclical effect is new ideas emerge to take advantage of cheap supply and drive new demand

Ultimately, I think in the automotive sector in particular the management made a conservative decision that ultimately may have been fatal to them. They broke the JIT pipeline because they assumed, wrongly, that the Trump admin would not bail them out.

The lockdowns happened and some lever got pulled. They dusted off the “We love you America, come back and buy a car someday” commercial’s, cancelled everything, and opened the bottle of Scotch.