How Volvo mitigated the worst of the chip shortage

16 May 2022

Volvo has been praised for its “adaptable and creative” response to the semiconductor shortage.

Joshua Nicholls, senior consultant at consultancy group Proxima, told Supply Management the carmaker had shifted to double-sourcing and “looking beyond usual suppliers” in response to the crisis.

Volvo reported record profitability for 2021 despite the chip shortage. Full-year revenue was $30.3bn with an operating margin of 7.2%, up on 3.2% in 2020 and 5.2% in 2019.

Nicholls said: “Volvo’s approach to dealing with the semiconductor shortage has been impressive in many ways, they’ve shown themselves to be both adaptable and creative. One thing that makes it stand out is the company’s shift towards double-sourcing, looking beyond usual suppliers in China as lockdowns add to supply chain pressures.

“Traditionally, automotive companies work with one trusted partner, putting all their eggs in one basket to get the best price just in time. However, broadening and deepening access to the supply chain is a way in which companies can mitigate against risks.”

He said there was a “growing trend of de-globalisation” which represents “a shift in mindset that manufacturing should take place a bit closer to home”.

Investments in semiconductor hubs away from Asia including the Chips for America Act in the US were “indicative of manufacturers and governments trying to wield more control over as much of their supply chain as possible”, he said.

However, there is “no perfect solution” to the semiconductor shortages and procurement teams must remain “agile” to mitigate disruptions. 

Nicholls said: “Volvo has been reactive and agile but the important thing to consider is that there is no perfect solution to such a complex problem. It is vital that businesses do not become complacent even if positive improvements can be seen in the short term. Much can be learnt from other automobile manufacturers such as Tesla who have been less reliant on its suppliers due to its innovative re-engineering of software to circumvent constraint dependencies. 

“Ultimately, whilst Volvo has done a good job so far, the key is not to become complacent as the situation continues to evolve.”

Meanwhile, Jaguar Land Rover reported a pre-tax loss of £412m in its latest quarterly results, adding it was “constrained by semiconductor shortages”. 

Thierry Bollore, CEO at JLR, said the operating environment “remains difficult in light of the global chip shortage and other challenges”.

Revenue in the fourth quarter was £18.3bn, down 7% year-on-year.

JLR said it expected chip shortages to persist through the next financial year, with “gradual improvement”. 

Pat Gelsinger, CEO of Intel, has said the chip shortage cost the US economy $240bn in 2021 and warned shortages would continue into 2024 “at least”.

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