Shortage of Semiconductor Chips: The Why and How Behind it

It is often said that “Semiconductors are the powerhouse to the modern world”. Semiconductor chips play a key role in any electronic device whether it’s a laptop, car, phone, washing machine, refrigerator, etc. As cars, scooters, bikes and trucks are being modernized with digital means like digital display, bluetooth, navigation, driver-assist and hybrid electronic systems, there is more demand for semiconductor chips in the automotive industry. The auto business in this Covid-19 pandemic experienced the deficiency of semiconductors worldwide. Some of the biggest car manufacturers in India including Maruti Suzuki, Mahindra & Mahindra and Tata Motors are facing a production crisis due to a shortage of semiconductors chips. In this blog, we are going to discuss these crises amongst cars, their reasons and finally, what is the current circumstance of semiconductor deficiency in India from Indian car goliaths like Maruti Suzuki and Tata Motors? So with that keeping in mind let’s get right into it. Now before starting with our main topic let’s discuss what are Semiconductors?

What are semiconductors?

Semiconductors are silicon chips that help to control the functions of memory in different types of products including automobiles, computers, mobile phones and various other electronic devices. The rising demand for semiconductors has enabled carmakers across India to constantly make products so that they provide us with advanced features and hybrid-electric systems.

Why is There a Shortage of Semiconductors?

A number of factors have led to a shortage of semiconductor chips in the automotive industry. Here we will cover the most significant ones which affected automakers all around the world.

Covid-19 Crisis
At the start of 2020, the world was hit the Covid-19 pandemic, people were working from home, studying from home, and practically lived their lives from home. This led to large purchases of extra monitors for work from home, TV and game consoles to overcome boredom in lockdown. Even the factories were shut down and this was something which resulted in less supply of semiconductor chips. The demand for semiconductor chips in 2020 was worth $439 billion while in 2019 it stood at $412.3 billion. 

Covid-19 Crisis affecting semiconductor chips

The auto OEM’s had cancelled all the orders of semiconductor chips in the middle of the Covid pandemic last year. These chip suppliers have turned into clients for the automakers. Now the current situation is such that it takes quite a lot of time to resume the supply chain for the automotive industry. 

Delay in Orders 
The car manufacturers and consumer electronics manufacturers have not been receiving enough chips to scale the production. This chip shortage is measured in chip lead time. Now the lead time is the duration between when a chip is ordered and when it is delivered. There was a report in Bloomsburg from research conducted by Susquehanna Financial Group which says, the chip lead time was increased up to 18 weeks in June 2021, from 12 weeks at the beginning of 2020. The carmakers across the world kept low inventory holdings and relied mostly on an electronic industry supply chain to scale their production as per the demand. 

Semiconductor chips shortage
Source: Susquehanna Financial Group

Increase in the Number of Resistors
The number of transistors that are mounted in IC circuit chips doubles every two years. Particularly, over the decade there has been an increase in chip consumption over the last decade along with the rising contribution of electronic parts and components in cars. Today the electronic parts and components are accountable for 40% of the cost of a brand new internal combustion engine car. If we compare this number with the last two decades it was less than 20%. 

The Current Situation in the Indian Automobile Sector

In August 2021, Maruti Suzuki India’s largest carmaker made sales of 68,184 mini-mid size passenger vehicles. Here when you compare it with August 2020 it was 82,888 units. The total sales for the company fell to 105,775 units in August 2021 compared to 115,325 last year in the same month. The Gujarat plant of Suzuki Motors has to scale down its production to a single shift at some manufacturing lines in the plant at the beginning of August 2021. A statement from the company said that “Owing to the semiconductor shortage situation, the company has been informed by its contract manufacturing company, SMG, that production will be partially impacted in this month”.

The other Auto OEMs were green in August until then the shortage of semiconductors slowly affected Mahindra & Mahindra and Tata Motors. Mahindra and Mahindra experienced a 20-25% dip in production volumes of its automotive division in September due to a semiconductors shortage. There are several news reports which say that due to this Mahindra will shut its plants for seven days. They said that our revenues and profits will be impacted in line with the fall in production volumes.

Tata Motors saw a development of 51% in the month on a year-on-year basis, however, the organization has seen conveyances go down 7% on a month-on-month basis because of deficiencies. In the recent press release the company made the statement by saying that, “Semiconductor shortage continues to impact the auto industry globally. The recent lockdowns in East Asia have worsened the supply situation and hence Tata Motors is forced to moderate production and offtake volumes in the coming months.” Although the company is trying to engage with extending the supply chain partners, gaining chipsets from the open market, looking for alternative chips, etc.

Current Situation in the World
Due to the shortage of semiconductors, some companies have started neglecting important features and high-end electronic capabilities temporarily. Nissan- the Japanese carmaker is going to leave the navigation systems because of a shortage of chips. On the other hand, Renault, a French company, has now stopped providing the big oversized digital screen behind the steering wheel on its Arkana SUV.

Our Word

This is my perspective that the lack of semiconductors will gigantically affect the tech industry, as well as different enterprises including automobiles, smart devices, etc. There will be a revival of semiconductor chips in India as we can see the positive signs ahead of the festive season. As per recent news, our Union minister Piyush Goyal has said that we are very much focused on bringing the semiconductor industry to India. This shows us that we can still overcome this famine of semiconductor chips across the world.

Talking from the world’s perspective I strongly feel that companies like Mercedes, VW and BMW will face chip storage due to advanced displays and electronic components they use in their cars. However, it is too early to say when we can bring back the normalcy in the production of chips, especially in the automobile industry. Let us know your thoughts on this famine of chips concerning the automotive industry in the comments section below. 

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