Semiconductor chips shortage
24/05/2021

Tags:

Context:

  • A protracted shortage of inputs, especially semiconductor chips, has made India-based car manufactures and premium bike makers curtail production across categories.
  • Carmakers in India are facing this chip famine by constraining production, and their global counterparts have got more creative in addressing the shortage.

Why did the chip famine occur?

  • Beginning of the COVID-19 pandemic and the subsequent lockdowns across the world shut crucial chip-making facilities in countries including Japan, South Korea, China, and the US.
  • Chip shortage causes cascading effects, given that the first one creates pent-up demand that becomes the cause for the follow-up famine.

Impact of the chip famine:

  • Consumers of semiconductor chips, which are mainly car manufacturers and consumer electronics manufactures, have not been receiving enough of this crucial input to continue production.
  • Chip shortage is measured in chip lead time, which is the gap between when a chip is ordered and when it is delivered.
  • The increase in chip consumption over the last decade is also partly attributable to the rising contribution of electronic components in a car’s bill of materials.
  • Electronic parts and components today account for 40% of the cost of a new internal combustion engine car, up from less than 20% two decades ago. Chips account for a bulk of this increase.

Response of vehicle makers:

  • Companies are flagging concerns over seamless availability of raw materials, especially semiconductors. Supply constraints are learnt to have caused some output issues in companies.
  • In addition to delaying vehicle deliveries, some companies have reportedly started discarding features and high-end electronic capabilities on a temporary basis to deal with the chip shortage.

What is next?

  • Companies would build a buffer and not let it affect their production.IHS Markit estimates that the demand for semiconductors in the final quarter of 2020 increased at a stronger-than-expected rate.
  • There are also indications that semiconductor suppliers should be able to absorb the demand based on the light vehicle production forecast over the course of 2021, especially the second half.
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