Semiconductor chips shortage
- 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.