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Brand new Subaru cars sit in a storage lot at Auto Warehouse Co. on May 14, 2021 in Richmond, California.Justin Sullivan/Getty Images

Canada’s automotive sector is at a crossroads, its recovery hampered by a continuing shortage of semiconductor chips that has plagued industries globally.

Current vehicles have anywhere from 30 to 50 chips in them, since every electronic component needs a semiconductor to run. They are the microchips that help power so many of a vehicle’s functions and features. Auto makers and their suppliers expect that number to rise as more vehicles become electrified and adopt autonomous driving technologies.

To date, the shortage has shown ripple effects. Statistics Canada data highlighted a 10.2-per-cent decrease in vehicle and parts exports in February, 2021, alone. That figure is significant given that the industry is worth $19-billion and directly employs about 129,000 people across the country according to Unifor, though Statscan data also shows that almost 500,000 were employed in various motor vehicle and automotive industries.

To increase efficiency during production, auto makers try to order only the supplies they need for the near future, a practice called “just-in-time manufacturing.” The massive bounceback in demand for cars, coupled with fierce competition for chips from other industries such as consumer electronics, has led to a supply crunch for the entire auto industry.

It’s why many see the situation as an opportunity for Canada to reposition itself in the global automotive industry and reduce its reliance on international suppliers.

COVID-19 demonstrated vulnerabilities and gaps in global supply chains, so I do believe we should be framing [the chip shortage] as a demand opportunity, not a constraint one,” says Melissa Chee, chief executive officer of VentureLab, a tech incubator based in Markham, Ont. “Do we really want to just be final assembly, or could we rethink the role we play in that final [chip] ecosystem?”

One way to find out is to work with the auto industry to understand whether they would be willing to buy chips if they were developed and made in Canada, she adds. It could mark a “strategic advantage” of being part of a North American supply chain that would reduce dependency on exports concentrated overseas.

Building fabrication plants to make the chips would cost billions of dollars and take years to construct, given their size, which could run hundreds of acres, says Shawn DuBravac, president of the Avrio Institute, a consultancy that follows the technology industry.

The U.S. government says it will try, while Intel plans to invest in increased fabrication capacity in Arizona. Even Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest chip maker, indicated it will invest in manufacturing and development stateside.

In the meantime, auto makers are doing their best to ensure customers don’t have to pay a premium to sit in the driver’s seat of a new vehicle because of the run on chips. Various auto makers, including General Motors and Ford, and Tier 1 suppliers such as Magna International, declined to speak for this article, though indicated in e-mail statements that they were managing the shortage well.

“At the same time, they’ve ramped up their ordering, and there’s a lead time they have to contend with, which is an average of about 14 weeks to turn a fabricated wafer into a semiconductor,” says DuBravac. “Auto manufacturers have been working to simply catch up with the unexpected strength in orders, which they likely didn’t forecast because of the pandemic.”

They are more likely to cut production than actually shut down a product line, he adds. That could mean reducing the number of shifts at plants, and focusing more on models with greater profitability and leaner inventories. In some instances, certain promised features may also be axed.

Such was the case in March, 2021, when GM announced it was removing its fuel management cylinder deactivation technology on 2021 Silverado and Sierra pickups with a 5.3-litre V8 engine. Despite lighter inventory across their product lines, he finds it unlikely that auto makers will make any significant deviations from their planned 2021 launches. Nor should prices increase at dealerships because of supply issues, he says.

Despite the uncertainty, chip developers within Canada, including D-Wave, 1QBit and others, hope this may be the turning point that the domestic industry needed to gain more financial support.

Montreal-based startup Spark Microsystems Inc. has designed its own chip for vehicles that uses ultra-wideband (UWB) technology to replace some of their car’s electrical wiring. The lower power consumption would ostensibly increase the vehicle’s efficiency and power output.

Spark’s chipsets aren’t in any vehicles currently manufactured by any auto maker yet, nor in any parts coming from suppliers. Manufacturing the chips would require fabrication plants outside Canada, and for smaller players like Spark, which received patents for its designs in 2020, there’s a balancing act.

“Unfortunately, there’s no magic in how to manage the relationship you have with your contractors who build your chip,” says Frederic Nakbi, chief technology officer of Spark Microsystems. “When you’re a smaller customer, you’ve got to order a year in advance, bringing about all the logistical nightmares, but you have no choice or else you’re not going to sell any products.”

Bringing that building capacity closer to home would be beneficial, Nakbi says, as it would also cut down on the waiting time to get chips made and deployed. Setting up larger fabrication plants in Canada, and augmenting existing ones to build the most cutting-edge chips would be helpful, he says. though he also argues that an equally effective solution would be to focus on semiconductor research and development, to compete with other markets for the “brains” that create the chips themselves.

“It’s no secret that there are epicentres of chip design in Silicon Valley and other parts of the world,” he says. By comparison, Canada’s talent pool, although healthy, isn’t “vast.” And beyond the automotive sector, semiconductor chips are also key to the biomedical, telecommunications, education and science sectors too, he adds.

Government funding to help the chip development and manufacturing cause is still at a trickle. Chee’s VentureLab received $9.73-million in federal funding for its Hardware Catalyst Initiative, Canada’s first incubator hub for silicon startups and projects. It’s a drop in the bucket in the grander scheme, and she co-founded an advocacy and lobbying group called Canada’s Semiconductor Council to spur both private and public investment.

“Our mantra is to build the skills and make some strategic bets as a country because Canada already wants to be a leader in the EV [electric vehicle] space and North American battery supply chain,” Chee says. “We know where we want to go; we know that the automotive sector is going through a transformation and this shortage is our opportunity to figure that out because we have all the expertise to do it.”

Editor’s note: A previous version of this story stated that VentureLab had received $5-million in federal funding. The Globe regrets the error.

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