Chip Shortage in Honda: Causes and Solutions

Subject: Case Studies
Pages: 2
Words: 577
Reading time:
2 min
Study level: College

An article by Nicholas et al. discusses the sales hit experienced by car producers all around the world as the economy gradually recovers from the first negative effects of the COVID-19 pandemic. This particular disadvantage comes from the lack of chips that are essential for the production of all electronics in modern cars, as chip producers are unable to cope with the increase in demand. In particular, Honda, the Japanese car manufacturer, was forced to decrease the output of one of its facilities by 4,000 cars (Nicholas et al.). Due to the lack of spare parts and, thus, the inability to manufacture the number of cars that would correspond to the market’s demand, Honda faces a sales hit. The article discusses the relative advantages and disadvantages of accumulating spare parts, such as chips, in advance and concludes that it is unlikely that the industry will learn from this experience.

The problem is indeed as wide as the entire automotive industry since the vast majority of car producers experience the same exact problem in early 2021. The COVID-19 pandemic decreased the sales of cars worldwide, which had a corresponding impact on car parts. Car manufacturers, unwilling to buy the same amount of parts for a lesser amount of products, and, thus, decrease their revenues while creating stockpiles of chips, regulated their purchases accordingly (Nicholas et al.). However, consumer-electronics companies were quick to claim the chips that the automotive industry no longer needed. It created a situation when the automotive industry received even a lesser share of chips produced than before the pandemic with little if any opportunity to acquire greater quantities when the necessity arises. Apart from Honda, the companies affected by this tendency include Volkswagen, Nissan, Chrysler, and Daimler (Nicholas et al.). Thus, the current sales hit is not a company-specific case but a trend that affects the entire automotive industry and, as such, calls for a business-level strategy.

An effective strategy to counter this trend would be straightening the supply chain and foregoing mediators in acquiring chips for car manufacturing. As of now, most companies in the automotive industry do not obtain their chips directly from the producers, such as the Taiwan Semiconductor Manufacturing Co. that controls roughly half of the market (Nicholas et al.). Instead, the companies usually turn to specialized suppliers, who, in turn, place orders among smaller auto-focused chip manufacturers. That would be an example of effective diversification if said auto-focused manufacturers did not outsource much of their production to the very same Taiwan Semiconductor Manufacturing Co. (Nicholas et al.). Thus, the result is diversification in name only that leads to a longer supply chain with more potential for disruptions. Hence, Honda would likely have an easier time obtaining the chips it needs directly from the manufacturers rather than through intermediaries.

This strategy is likely the best option for competing in the automotive industry under present conditions. Accumulating stockpiles of parts in advance can lead to greater financial losses than the current sales hit itself (Nicholas et al.). Attempting to create the company’s own production of chips is unlikely to pay off in a low-margin industry such as the automotive one. Apart from that, the only available option is what the companies currently do – that is, weather the storm and wait until chip supply grows to satisfy the demand. With this in mind, forging direct ties with the chip manufacturers seems to be the best option for Honda from the cost-benefits perspective.


Nicholas, K. et al. “Carmakers Face $61 Billion Sales Hit From Pandemic Chip Shortage.” Bloomberg BusinessWeek, 2021. Web.