Industry Insights

How will increased emphasis on partial hybrid vehicles impact chip supply?

Author: Frank Cavallaro, CEO, A2 Global Electronics

Electric vehicle (EV) sales have slowed. A lack of charging infrastructure, coupled with high prices, is holding back widespread adoption. According to reports from automakers released in April, US sales of electric vehicles grew only 2.7% during the first quarter of this year, far below the 47% growth that fuelled record sales and a 7.6% market share last year.

In the midst of this slowdown in consumer demand, electric car companies have ramped up production of partial hybrid vehicles, also known as plug-in hybrids (PHEVs). These could save the EV industry and serve as a bridge for consumers looking to dip their toes into the EV market. In many cases, they’re more efficient for automakers to manufacture since they can leverage existing engine technology alongside electric motors.

What does this mean for the semiconductor market? It’s a good thing for certain players.

Partial hybrids require fewer chips than pure EVs and some different types of components. As auto manufacturers de-emphasise pure electric vehicles in favour of PHEVs, it will free up semiconductor supply for those remaining in the market. Specifically, there will be increased availability of chips with mature nodes, greater than 28nm. This could also benefit those in the partial hybrid space and support their continued growth.

Though the chip supply outlook for the automotive and EV industry is largely positive, we are in an uncertain and hyper-competitive market. EV demand may pick back up, charging infrastructure production may consume chip supply, or forces outside the auto industry may disrupt the balance.

EV and automotive OEMs must prepare for unforecasted supply chain disruptions, off-target projections, and shortages for certain components by strengthening sourcing strategies.

Understanding EV adoption slowdown and industry challenges

EV companies, such as Tesla, Rivian, and Lucid, are struggling financially. Near the end of February 2024, Rivian and Lucid reported disappointing production outlooks. Rivian announced that it would lay off 10% of its salaried workforce. Both companies cite high-interest rates and economic uncertainty as the top reasons EV demand has waned, but an ongoing study by J.D. Power finds that inoperable and poorly maintained public charging stations increasingly frustrate drivers. Inconvenient charging is a major hurdle to continued market growth, and one that will take years and significant government-supported infrastructure development to overcome.

The booming EV revolution that many in the industry foresaw a few years ago seems to be slipping further away. Carmakers such as General Motors and Ford say that they are still committed to producing EVs, but the larger market push will take longer than expected. They’ve scaled back plans for battery factories or other EV-related facilities in the near term. Even EV pioneer Tesla has cut costs, recently announcing a plan to lay off more than 10% of its workers.

How the shift to partial hybrids could help the auto industry

The trend of electric and traditional car companies increasing production of partial hybrids will continue indefinitely – PHEVs check consumer, financing, and regulatory boxes.

PHEVs offer the flexibility and affordability that consumers need. Average buyers can finance PHEVs far more easily than they could a pure EV, as they have more residual value.

Additionally, partial hybrids use a gasoline engine as a backup, easing concerns about running out of battery power on long trips – a common worry for some EV-hesitant consumers. This can help attract more buyers to electric technology.

The cost of EV batteries has been an industry-wide challenge from the beginning. PHEVs require smaller batteries than pure EVs, which can bring down the overall vehicle cost, making them more accessible to a wider range of buyers.

By shifting emphasis to partial hybrid vehicles, auto manufacturers could drive EV sales overall and build a larger consumer base. This not only benefits the industry financially, but also from a chip supply perspective.

PHEVs use fewer and some different types of chips than pure EVs. The chips required for EVs may become more plentiful since consumer demand has softened, freeing up supply for the partial hybrid manufacturers and those still making pure EVs.

However, as always, it’s a delicate balance. Charging infrastructure production is expected to ramp up soon, which uses the same wafer node size as is used by EVs. This could push this balance into a shortage environment.

In addition, if many auto manufacturers rapidly accelerate PHEV production, demand for required chips may begin to outpace supply. The competition for chips could create manufacturing and sourcing challenges within the automotive industry.

Additional considerations: component production capacity limitations

Any semiconductor supply constraints will be exacerbated by chip production limitations related to the specific wafer node sizes required. Fabrication plants (fabs) are limited in the amount of chips they can produce, and new fab construction – promising to increase production capacity – has been continually delayed in the US.

New fabs are also unlikely to alleviate EV supply constraints. New fab investments are focused on growing markets like AI and hyper-scaler/Cloud applications that require components smaller than 11nm. Few companies are willing to invest in the larger automotive node sizes.

Further complicating the situation is the long lead time for EV semiconductors. The design cycle for an automotive chip is about 60 months, much longer than most other chips. Fabs will have to dedicate a substantial portion of their capacity to meet long-term demand rather than current needs. Given the uncertainty of the EV market, fabs may be weighing the risks and rewards of such an investment.

Preparing for an uncertain market

While the focus on partial hybrids will likely free up chip supply and benefit certain industry players, EV and automotive OEMs must be prepared for anything. Here are three strategies OEMs can employ to mitigate risks and source required components in the face of uncertainty:

Building a supplier network: supply chains have become more interconnected. Building a network of resilient suppliers – around the world and near manufacturing sites – gives OEMs options when shortages arise and lowers the risk of disruption if an unexpected event occurs where the bulk of their components are produced

Be proactive: being proactive by recognising supply chain disruptions and adapting quickly, rather than waiting for it to build, is critical to a resilient supply chain strategy

Leveraging advanced analytics: choosing reliable, up-to-date sources for market forecast information and consulting with multiple players in the industry – partners, suppliers, customers, and even competitors – helps gain a holistic approach

Those that adapt to shifts in demand, keep a finger on the pulse of industry trends, and continually strengthen sourcing strategies, will have a much smoother road.