Trade union: Chip crisis in automobile sector will impact small suppliers the most

The ongoing crisis in the automobile sector, caused by a shortage of chips, will hit small suppliers who don’t have international backing especially hard, according to Jaroslav Souček, the chairman of one of the Czech Republic’s largest trade unions - KOVO. The government may consider using COVID-19 subsidies to prop up these businesses in order to avoid shortages of other materials in the future.

Speaking after a board meeting in Hradec Králové on Wednesday, Mr Souček said that businesses which are part of a conglomerate will be able to rely on help from their parent company. Aside from car manufacturers themselves, such as Škoda Auto, this includes large suppliers of specific parts, such as Bosch or Valeo.

However, the trade union expects that smaller suppliers in the Czech Republic will be hit the hardest, especially those producing plastics, textile materials, rubber and various small parts. This, according to Mr Souček, is the consequence of previous manufacturer policies, which placed priority on suppliers to deliver products at the lowest prices and to push these down further annually.

“This meant that small suppliers were not able to establish any sort of financial cushion for themselves,” Mr Souček told the Czech News Agency.

If small suppliers are forced to close down, the trade union chief believes that it could have long term effects beyond the chip shortage. Car manufacturers may be unable to immediately restart production, because there will be further shortages of materials caused by the bankruptcy of suppliers.

State could use subsidies to prop up suppliers

Jaroslav Souček | Photo: KOVO trade union

One way to avoid this prospect would be if the state used funds from its Antivirus business support programme to prop up small suppliers, Mr Souček said. The country’s Council of Economic and Social Agreement, which contains representatives of business, government and trade unions, agreed on this measure on Monday.

The state could therefore subsidise these businesses with up to 60 percent of worker salaries, capped at CZK 29,000 a month. However, this level of support for the country’s automobile sector would have to first be agreed with the European Commission. Current Czech Prime Minister Andrej Babiš said that the government could discuss the subsidy programme before November 7.

The antivirus programme was used to subsidise the salaries of people in quarantine and businesses affected by lack of demand, supplies and personnel during the height of the coronavirus epidemic in Czechia. EU rules stipulate that the subsidies can be handed out until the end of this year, the Czech News Agency writes. For now, affected businesses could use the subsidies that have been marked out for October and November.

Global chip shortage exposing overreliance on just-in-time supply

Company production plans suggest that it is European car manufacturers who are currently the hardest hit by the ongoing shortage of semiconductors. Czech car maker Škoda Auto, which is part of the Volkswagen Group, has been forced to halt, or significantly limit, production in all of its three factories in the country for two weeks starting Monday. Statements from Volkswagen Group executives suggest that the chip shortage will continue at least until the second half of 2022.

Asian car manufacturers have been able to weather the storm more effectively. However, Japanese car maker Toyota announced earlier this week that it too will now have to cut production by about 15 percent in November.

Analysts have mainly put the blame for the global chip shortage on the coronavirus pandemic, which suddenly raised demand for semiconductors while at the same time causing disruptions in global supply chains. However, fingers are also being pointed to business’ overreliance on fragile global supply chains and just-in-time supply systems, rather than localised production and investment into reserve storage.