The automobile industry is being hit hard by a shortage of computer chips that has slowed production and is set to drag on for months.

Carmakers and suppliers have turned in strong results that beat expectations for the first half of the year, but they warned that a lack of semiconductors had crimped production.

Microchips are essential for the electronics systems of modern cars and have been in short supply since the end of last year.

The start of the COVID-19 crisis in early 2020 prompted a global spending spree on electronic items – from extra monitors as people rushed to set up home offices, to televisions and games consoles for beating lockdown boredom.

Temporary factory closures due to the pandemic also put pressure on supplies.

And as plants reopened, electronic goods producers continued to place orders – creating an ever-increasing backlog for the chips, which can be just a fraction of a millimeter long.

The situation is to some extent the fault of carmakers, who scaled back orders when the pandemic hit, so chipmakers shifted output to consumer electronics, which was seeing a boom in demand as people splurged on equipment to work and relax at home.

That has left car brands, from Volkswagen to Jaguar Land Rover, scrambling to get hold of semiconductors now that sales are revving up again, with many slowing or even temporarily halting production at factories.

Smartphone makers had been relatively protected so far as they had existing stockpiles of chips, but they too are starting to suffer.

While automakers and analysts were initially confident the impact would be short-lived and limited, they now see it as lasting through the rest of the year and the impact as more significant.

Jaguar Land Rover has warned the chip shortage could cut its third-quarter output by half.

The Volkswagen Group said the impact was likely to be "more pronounced" in the third quarter as it lowered its annual production forecast by roughly 450,000 vehicles.

That is 5% of last year's production level, or a third of the output increase that VW had expected earlier this year.

"The risk of bottlenecks and disruption in the supply of semiconductor components has intensified throughout the industry," the German automaker said.

Apple CEO Tim Cook warned this week that the shortages are set to hit the production of iPhones and iPads. Smaller phone-makers are likely to be worse affected, analysts say.

Games consoles like the PlayStation 5 and Xbox Series X have also been in short supply.

So great is the clamor among gamers to get hold of chip-powered graphic cards needed for their playing that they have been resorting to increasingly unusual strategies.

The die-hards are tuning in to live streams on YouTube and Twitch, which ring an alarm every time a card is listed for sale online.

'Chipaggedon'

VW said one way it was coping with the shortage was by favoring high-end vehicles, which bring in more money.

U.S. automaker Ford noted that the keen demand for vehicles created by the shortage meant that it could offer fewer promotions as well as focus on its most profitable models.

Ford said its average sale price rose by 14% from last year as it surprised analysts with a $1.1 billion second-quarter profit.

Nissan has been forced to push back the launch of its new all-electric crossover, the Ariya, due to the shortage of chips, which some news outlets have dubbed a "chiptastrophe" or "chipaggedon."

But the worst may already be behind automakers, according to one analyst.

"We've reached the peak of the crisis," said Ferdinand Dudenhoeffer, head of the Center for Automotive Research in Germany.

"The situation will improve as new production capacity becomes available, but the problem won't be over by the end of 2021 and could continue until 2023," Dudenhoeffer told AFP.

He forecast the shortage would result in an overall loss in production of 5.2 million vehicles this year.

Consumers are likely to notice longer delays and higher prices as dealers have worked through their stocks and manufacturers offer fewer promotions.

Prices for used cars have also risen as unfulfilled demand has shifted from the new car market.

Automotive supplier Valeo, which uses chips in its driving assistance and automatic lighting systems, says it has so far escaped a halt in production.

However, the French firm notes it has been buying up any supplies it can get its hands on and expects shortages to last until next year.

Chained up

Automakers have for years moved to reduce the supplies they keep on hand to boost their financial performance.

The crisis appears to be provoking manufacturers to reevaluate this practice, dubbed "just in time."

"Suppliers and OEMs (original equipment manufacturers) are reassessing their supply chains and are trying to have more control over their sourcing, from different channels and by diversifying where possible," said Nils Poel from the European Association of Automotive Suppliers.

But as automakers overcome the chip shortage another problem awaits, Dudenhoeffer warned.

With carmakers aiming to quickly ramp up the production of electric vehicles, battery firms will likely have trouble keeping up and shortages could appear beginning in 2023, he said.

When will this end?

Meanwhile, governments are hurrying to boost their chip-making capacities.

In May, South Korea announced a whopping $451 billion investment in its bid to become a semiconductor giant, while the U.S. Senate last month voted through $52 billion in subsidies for chip plants, known as "fabs."

The European Union is seeking to double its share of global chip-manufacturing capacity to 20% of the market by 2030.

But factories cannot open overnight – particularly those that make semiconductors, a delicate process that involves pressing layers of chemicals into silicon.

"Building new capacity takes time – for a new fab, more than 2.5 years – so most expansions that are starting now will not increase the available capacity until 2023," said Ondrej Burkacky, senior partner and co-leader of the global semiconductors practice at consultancy McKinsey.

He added that long-term factors also meant global demand was in "hyper-growth," such as the trend towards companies storing their data in the cloud, requiring more and more data centers to be built – sites that use huge quantities of chips.

Jean-Marc Chery, CEO of Franco-Italian chip-maker STMicroelectronics, said orders for next year have already outstripped his company's manufacturing capacities.

There is a broad acknowledgment within the industry that the shortage "will last up to next year minimum," he said.

Analysts say the continuing squeeze could lead to higher prices for consumers.

SEB, a French maker of kitchen equipment such as blenders, has already warned that it is being forced to hike its prices.