The automobile microchip shortage that occurred as a result of the pandemic provides a clear example of how a seemingly small disruption can ripple across industries, reshaping markets and requiring strategic agility. With the passing of time offering perspective, I examined the impact of a car chip shortage on the supply chain, and how we can use those lessons to manage the uncertainty from the recent sporadic tariffs. Tariffs, too, are a significant factor influencing supply chains; the truth is, however, that they are just another form of disruption. Businesses that succeed in an environment of uncertainty – whether it’s a shortage of microchips or unexpected shifts in tariffs – are those that embrace collaboration, rethink globalization strategies, and build antifragile supply chains that can thrive amid uncertainty.
One Tiny Part Broke an Entire Industry
The car chip is the “brain” of the automobile. Today’s modern cars cannot be manufactured without them. And in 2023, there was such a significant shortage of car chips that new car lots were empty. According to a Toyota dealership, the COVID-19 pandemic interfered with both chip production and global shipping, which ultimately led to the car chip shortage. One minuscule part disrupted the global supply of automobiles. Dealerships were left shortchanged, with little or no inventory on hand. Consumers were frustrated.
Supply Chain Decisions Focused on Short-Term Profit Rather than Long-Term Vision
In a report entitled “The Chip Crisis in the Automotive Industry,” Alexander Ziegler and Eckhard Heidling analyzed the impact of the chip crisis on the German automotive industry. They defined the crisis as follows (I’ve bolded key points):
The chip crisis caught many companies in the automotive industry off guard. At the start of the COVID 19 pandemic in 2020, OEM management anticipated a prolonged slump in demand for vehicles, revised their production plans and communicated this information to suppliers. To avoid inventory costs, suppliers in turn cancelled much of their orders for chips from semiconductor companies. However, when demand for automobiles rebounded unexpectedly quickly after the initial lockdowns were lifted, semiconductor manufacturers had shifted capacity previously reserved for the automotive industry to meet the rapidly growing demand for chips used in office and consumer electronics. As chips have been incorporated into more and more components of modern vehicles over the years – from window regulators to engine controls – the sudden shortage had huge implications for the automotive industry. If just one chip was missing, vehicles could not be completed and delivered. Many companies were forced to cut back on production because of the chip shortage. Shifts were cancelled, model series were put on hold, entire plants were temporarily closed and employees in Germany were repeatedly put on short-time work (Kurzarbeit).
While this was an analysis of the German automotive market, it certainly applied to the U.S. market as well. The mistake, of course, was in not realizing the potential impact of this small but critical component on the supply chain, of making short-term savings decisions to reduce inventory in favor of long-term planning to prepare for the unexpected, and in not having deep layers of suppliers for the component needed.
Result of the Chip Shortage
According to PBS News, car manufacturers had to ease production, and the decrease in supply (along with an increase in consumer demand) resulted in a price inflation of more than 17.5%. But consumers in need of cars didn’t just wait for the auto manufacturers to receive chips – they turned to the used car market to purchase the cars they needed. This drove up the price of used cars, making it more difficult to obtain a reasonably priced automobile and leading to a shortage of used cars.
A Teads survey at the time of the shortage revealed consumer sentiment:
- 89% of consumers in the market to purchase a car in the forthcoming 6 months were aware of the existence of a chip shortage.
- 31% said that the shortage would affect their plans to buy a car.
- 14% considered purchasing used cars.
- 8% would likely delay buying their car.
Some car manufacturers opted to pull features for which the chips were required. According to BizLink:
Nissan has decided to leave out the navigation system for thousands of vehicles. It also no longer offers rearview mirror monitoring for blindspots [sic]. For Renault, it has stopped offering larger digital screens behind steering wheels on the Arkana SUV, saving on semiconductors. Stellantis, a car dealer in the US, which owns Jeep, Ram and other brands, are leaving out pickup trucks without the Electronic Detection System, which looks out for blind spots. General Motors is manufacturing pickup trucks without fuel management systems.
Spillover Impact of the Chip Shortage
The shortage of one critical component impacted car dealers around the country, but the subsequent shift toward purchasing used vehicles ended up impacting another industry. Because of the surge in used car purchasing and the lack of availability of new cars, car rental companies were unable to replenish their fleets and had to keep cars for a period of time longer than what was typical. Rather than trade in rental cars when they reached 40,000 miles, rental companies were forced to hold cars in their fleets until they reached 79,000 miles. Car rental companies also raised prices and, in many cases, required customers to rent for a full week or longer.
Supply Chain Management Lessons from the Chip Shortage – and How You Can Apply Them to the Current Tariff Disruptions
The chip shortage revealed systemic issues with the automotive industry supply chain. From overreliance on global suppliers to short-sighted decision making, the car chip shortage demonstrated how a focus on resilience and antifragility could potentially have changed the outcome, with lessons that can be applied to any supply chain crisis.
Failure: Lack of Strategic Planning
Without clear ownership, businesses risk missing critical changes in trade policies, which could result in unexpected costs, compliance penalties, and lost opportunities. Just as the automotive industry underestimated the long-term impact of chip shortages, many companies fail to assess how tariffs could be mitigated through proactive supply chain redesign. The chip shortage highlighted the risks of heavy dependence on overseas semiconductor manufacturers, especially those concentrated in specific regions like Taiwan or China.
Solution: Diversify suppliers. Rethink globalization – through nearshoring, reshoring, or “friend shoring” – offers a way to build resilience and avoid excessive dependency on vulnerable global supply chains. Friendshoring is an economic strategy where countries prioritize trade and investment with nations that share similar values, political systems, or strategic interests. This approach aims to reduce reliance on countries that may pose geopolitical risks or have unstable political environments. By focusing on “friendly” nations, countries hope to create more stable and secure supply chains. Think of it as Facebook market place on a grand global scale.
Failure: The Pitfalls of Short-Term Thinking
The chip shortage demonstrated the need for cross-functional collaboration; automakers that engaged closely with suppliers and customers to find workarounds were better able to navigate supply constraints. Organizations must foster similar collaboration in tariff management, ensuring that procurement, finance, compliance, and logistics work together toward common goals. Not one functional area owns tariff management. It is a business challenge so the CEO and executive leadership team own tariff management.
During the chip shortage, many automakers relied on just-in-time (JIT) inventory strategies, which left them without a safety cushion when demand surged; supply chains were disrupted as a result. Other automakers attempted to stockpile chips to offset production delays, which resulted in higher carrying costs, supply imbalances, and reduced flexibility when new policies emerged. Companies are reacting to tariff disruptions in much the same way – and it won’t work.
Solution: Break down department silos, get your C-suite working together, and create long-term solutions for disruptions that are proactive instead of reactive. Build strong supplier relationships and include your suppliers in your strategic planning.
What We Can Learn from the Chip Shortage for Handling Tariffs
A major supply chain crisis that resulted from a chip shortage conveyed valuable lessons. Automakers, as well as other industries, should apply these lessons to comparative critical components and disruptions, ensuring preparedness for future shocks. In a world where global trade policies are constantly shifting, no company is immune to tariffs. The question is not just who owns tariff management but how organizations can collectively embrace collaboration, foresight, and agility. Whether facing a microchip shortage or navigating evolving trade policies, the companies that thrive are those that don’t just react to disruptions – they build supply chains that grow stronger because of them.
Navigating a Shifting Landscape
Tariffs are tightly linked to international trade regulations, and mismanagement can result in fines, audits, and reputational damage. The semiconductor shortage exposed vulnerabilities in supply chain visibility. Many companies lacked insight into where and how their critical components were sourced. Addressing compliance risks requires the same level of vigilance: Businesses must have a clear understanding of sourcing, trade classifications, and shifting regulations, to ensure adaptability. It’s all about data visibility and management. Data is the new currency! To manage it well requires technology and well trained teams to create competitive advantage.
Adapt or Be Left Behind
Companies that failed to respond strategically to the chip shortage faced production delays, lost revenue, and frustrated customers. Likewise, businesses failing to respond to the ebb and flow of tariff policies risk being outpaced by competitors who adjust sourcing, pricing, and production more effectively. The rethinking of strategic globalization isn’t just about sidestepping tariffs; it’s about building a supply chain that can adapt dynamically to policy shifts and economic trends.
Seeing Beyond the Immediate Disruption
Supply chain disruptions, whether from tariffs or component shortages, are not just challenges; they are opportunities. Some companies capitalized on the chip shortage by redesigning products to use alternative semiconductors or by securing priority agreements with manufacturers. Similarly, businesses can turn tariffs into an advantage by restructuring supply chains, renegotiating contracts, or advocating for favorable trade policies.
The Way Forward: Rethinking Tariff Management
To stay ahead in a world of constant disruption, businesses must move beyond reactive responses and take a proactive, strategic approach to tariffs and supply chain design. This requires an investment in technology that makes real-time decision making more accurate and effective. It also requires a thoughtful approach to assessing tariff impacts that includes your entire C-suite in the strategic planning. This demands the breaking down of silos, to prevent departments from working at cross-purposes. Just as companies must prepare for supply chain disruptions, they must anticipate and build flexibility into their global operations, to mitigate trade policy risks.
Is Your Supply Chain Built for the Future?
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