How bad is the semiconductor chip shortage likely to get?

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Almost a year after Covid-19 began to limit semiconductor chip production, many companies are facing peak shortages as demand for cars and consumer electronics – two industries that remain badly hit – are seeing a surge in overall demand. With several car manufacturers limiting, and in certain cases, halting production, it’s important to know just how integral such a tiny component is, and the role it might play in keeping Indian car manufacturers from making timely deliveries of cars to their customers, particularly during the festive season, where an increase in sales is expected to make up for a lacklustre first quarter.

Why is a semiconductor shortage ravaging the global car industry?

Although carmakers are far from the only ones suffering the consequences of chip shortage, they continue to remain the worst hit. The shortage is expected to have emerged from the surge in demand for consumer electronics, particularly laptops, which were being supplied to employees working remotely.

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While the car industry did not face the impact due to poor demand in the early part of the pandemic, they began to feel the heat when demand for passenger vehicles went up due to a general reluctance to use public transport. This was made more severe by the fact that modern cars use a considerably higher number of semiconductors today than they ever did before.

What’s a semiconductor and why is it vital to the functioning of a modern automobile?

It’s almost impossible to overstate the value of semiconductors and the role they play in modern carmaking. Semiconductors are used in power steering, brake sensors, entertainment systems, parking cameras and more. In a world where cars are becoming more reliant on computer algorithms and data processing, silicon-based semiconductors will go on to form one of the main technological aspects of cars. They play an even larger role in EVs where they are responsible for battery management algorithms.

For conventional, internal combustion cars which are facing production hassles in India, semiconductors are used to operate pretty much any electronic component including safety mechanisms like airbag deployment, lane change assist, emergency braking systems – you name it. On average there are over 1,000 semiconductors in a passenger car.

At present, there are a handful of manufacturers leading the semiconductor space. These include Intel Inc, Nvidia Corp, Samsung and Qualcomm Technologies inc – all these brands have significantly ramped up production but continue to fall short of meeting the demands in what they have unequivocally expressed is an unprecedented situation, worse than anything they have experienced in the past or were prepared to experience.

Which brands are the worst affected and how is it likely to affect sales for the most lucrative quarter of the year?

Given that 80% of total passenger car sales in India, fall under the Rs 10 lakh mark, it’s the volume carmakers who have been worst affected by the shortage. While their inventories are stocked up till the month of August, it’s after September that things will get tricky. According to a statement released by Maruti Suzuki, production at its contract manufacturing plant in Gujarat will remain shut on the 14th and the 21st of August.

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The brand has also been forced to revise its production volume for Q2. Some of its top-selling models like the Maruti Suzuki Dzire, Swift and Baleno have seen an extension in their waiting period, while the brand has stated that it will assess the situation and how best to utilise resources, on a day-to-day basis.

It’s not just Maruti Suzuki but Hyundai, Tata Motors and Mahindra that have felt the pinch. Mahindra & Mahindra’s most coveted product, the Thar, has a waiting period of almost a year, the longest one in the car market, at present. Given that Malaysia is a major source of semiconductors for India and M&M in particular, and is going through another Covid-19 wave, the situation for Indian manufacturers looks dire. While M&M hasn’t announced any plans to cut down production, waiting periods for cars like the Thar and the XUV300, aren’t likely to get shorter or cater to timely supply during the festive period.

Even as the Indian car market begins to recover from the impact of the second wave, the shortage of semiconductors across the globe appears to be worsening. In the US,

General Motors announced as early as February that it was shutting down three plants and slowing production at a fourth due to this semiconductor shortage. According to a report in the Korean Times, Hyundai isn’t expecting to see a gradual recovery until 2022.

When is the shortage likely to end?

According to Reuters, the Chief Financial Officer of Stellantis has stated that the automotive industry is set to face disruption caused by the shortage, until 2022. However, several reports predict that the issue isn’t likely to be resolved until the end of 2023. For the Indian car market, this would mean that prolonged waiting periods will be the norm for some time to come.

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While brands like the Tata Group are looking to get into semiconductor manufacturing, India at present wholly relies on semiconductor imports to meet its market needs. According to chairman N Chandrasekaran, the disruption in global supply chains has created a great opportunity to manufacture semiconductors locally.

Local semiconductor manufacturing does require very large sums of money invested in the venture and isn’t likely to address the current shortage in the time it’s expected to last. That it has generally had small profit margins and is prone to safety issues, hasn’t helped.

With some of the biggest semiconductor manufacturing countries like Taiwan and Malaysia working overtime to ramp up production, carmakers the world over want to be the first in line to acquire them. How quickly some of the biggest carmakers in India will be able to acquire them remains unclear.