The car industry’s chip shortage started because automakers canceled semiconductor orders at the worst possible time. When COVID-19 lockdowns crushed car sales in early 2020, manufacturers stopped buying chips. Chipmakers quickly filled that freed-up capacity with orders from booming consumer electronics. By the time car demand bounced back months later, there was no production capacity left, and the resulting backlog cost the global auto industry an estimated $210 billion in revenue in 2021 alone.
How the Pandemic Created a Perfect Storm
The timeline matters. In March 2020, lockdowns forced auto plants to cut production or shut down entirely, and manufacturers canceled orders for components, particularly semiconductor chips. At the same time, millions of people suddenly working from home were buying laptops, tablets, gaming consoles, and wireless routers. Chipmakers, seeing surging demand from electronics companies and evaporating demand from automakers, reallocated their production capacity accordingly.
By the second half of 2020, vaccination campaigns and reopening economies brought car buyers back faster than anyone expected. Automakers rushed to place new chip orders, only to find that foundries were already running at or near full capacity serving the electronics sector. This created a brutal squeeze: the backlog at auto plants grew not because cars weren’t selling, but because the chips needed to build them had been promised to someone else. That capacity crunch deepened through 2021 and rippled through the industry for years.
Cars Use Chips That Nobody Wants to Make
A modern car contains dozens of semiconductors, but most of them aren’t the cutting-edge processors that grab headlines. The chips controlling your car’s power management, sensors, and basic electronics are built on manufacturing processes from the early 2000s, typically at 180nm or 130nm. Even the most advanced smart sensors in vehicles only use 65nm or 40nm technology. For context, the latest smartphone chips are built at 3nm, roughly 50 times smaller.
These older chips don’t shrink to newer, smaller manufacturing processes because there’s no technical reason to do so. The analog circuits that handle high voltages and sensor inputs don’t get faster or more efficient at smaller sizes. The chips work perfectly well on mature technology, and wafer prices are an order of magnitude lower on these older processes, with design and tooling costs multiple orders of magnitude cheaper as well.
This creates a strange economic problem. The factories making these chips have been running on equipment that’s over 20 years old, long since paid off. They’re essentially printing money with every chip. But building a new factory for these older processes doesn’t make financial sense for chipmakers, because the profit margins don’t justify billions in construction costs. And retooling an advanced factory to make simple automotive chips would be like buying a commercial kitchen to make toast. The investment in newer manufacturing technologies like advanced transistor designs adds significantly to costs that automotive chip buyers aren’t willing to pay.
Just-in-Time Manufacturing Backfired
The auto industry pioneered just-in-time manufacturing, a system where suppliers deliver parts exactly when they’re needed on the assembly line, minimizing the cost of keeping inventory on hand. For decades, this gave automakers enormous power over their supply chains. Every supplier had to organize around the pace and schedule of the car company. It kept costs low and control tight.
But a laser focus on lean inventory left the industry with virtually no buffer when disruptions hit. As researchers at Wharton have noted, when reducing inventory becomes the north star and every performance metric points toward that goal, it creates unprecedented levels of unpreparedness. There’s no consideration for pandemic-scale risks. The auto industry had essentially optimized itself for efficiency in normal times and left itself completely exposed to shocks. When chip orders were canceled in early 2020, there was no stockpile to fall back on. When demand returned, there was nothing in reserve.
The lesson hit hard enough that Toyota and other major carmakers announced they were stepping back from strict just-in-time production for critical components like semiconductors.
A Concentrated, Fragile Supply Chain
The automotive chip market is dominated by a small number of suppliers. NXP holds about 10.8% of the market, STMicroelectronics follows closely at 10.2%, Texas Instruments sits at 8.5%, and Renesas rounds out the top five at 6.7%. Together, these five companies account for roughly half of all automotive semiconductor sales. That concentration means a disruption at even one major supplier cascades quickly through the entire car industry.
Geography compounds the risk. Much of the world’s chip fabrication capacity is concentrated in East Asia, particularly Taiwan and South Korea. When the pandemic disrupted global shipping, factory staffing, and raw material supplies simultaneously, there were few alternative sources to turn to. Additional shocks, including a severe winter storm in Texas in 2021 that knocked out local chip plants, piled onto an already strained system.
Why the Problem Persists
Even years after the initial crisis, the supply chain hasn’t fully stabilized. Average automotive semiconductor lead times actually lengthened by almost two weeks in the fourth quarter of 2025, showing that the underlying structural issues remain. New chip fabrication plants take three to five years to build, and as noted, there’s limited financial incentive to build new capacity for the older chip technologies that cars rely on most.
Governments have stepped in with subsidies to encourage domestic chip production in the U.S., Europe, and elsewhere, but most of that investment targets advanced chips for AI and consumer electronics rather than the mature-node chips the auto industry desperately needs. Until new capacity specifically for automotive-grade semiconductors comes online, or automakers redesign their electronics to use chips that are easier to source, the industry remains vulnerable to the same kind of squeeze that started in 2020.