Chip shortage eases, offering hope for automobile makers: CRISIL

The global chip shortage, which has disrupted the automobile industry in India for a substantial part of fiscal 2021, 2022, and 2023, is finally showing signs of relief. Supply-chain challenges are being addressed, and improved predictive demand forecasts are enabling more stable production schedules.

According to a press release by CRISIL Ratings, the scarcity of semiconductors, essential components in a wide range of electronic devices, had a significant impact on automobile manufacturing, causing production delays and reduced sales in India.

However, the situation is gradually improving, with the supply-demand balance expected to normalize by fiscal 2026, thanks to the operation of new global manufacturing capacities.

Chips are vital components with unique electrical properties, serving as the backbone for electronic equipment and devices.

The computer and communication equipment (C&C) sector consumes approximately 63 per cent of the world's chip production, followed by the automotive sector at 13 per cent, and the consumer and industrial segments at 12 per cent.

Passenger vehicles (PVs) are the most chip-intensive among all vehicle types, utilizing an average of 1,500 chips.

The chip requirement increases as advanced electronic features are incorporated, with electric PVs using nearly twice as many chips as internal combustion engine (ICE) PVs.

Recent developments, including improved chip supply and decreased demand for computers and mobile phones, have led to a reallocation of chip resources, benefiting the automotive sector.
Anuj Sethi, Senior Director at CRISIL Ratings, commented, "The chip shortage faced by Indian passenger vehicle makers is easing, with current chip availability meeting 85 per cent-90 per cent of the total requirement. The production loss due to the chip shortage, which had previously halved to around 300,000 PVs in fiscal 2023, is now estimated to have further declined to under 200,000 PVs by the end of September 2023."

Despite the considerable improvement in chip availability, automakers are still dealing with a backlog of around 700,000 new orders as of the end of September 2023.

The global auto industry's recovery from the COVID-19 pandemic caught manufacturers off guard, as they hadn't placed significant chip orders by the time demand resurged in the latter part of fiscal 2022.

Production lines had already prioritized the C&C segment, responding to surging demand for personal computers, laptops, and mobile phones due to remote work, virtual learning, and telehealth services.

Geographically, the chip industry is unevenly distributed, with Western countries dominating chip design and architecture while semiconductor labs are concentrated in eastern nations like Taiwan and South Korea.

In an effort to balance chip supply, the United States and the European Union have offered incentives of approximately USD 100 billion to encourage local semiconductor fab development.

Many global players are investing around USD 360 billion to establish new facilities, which are expected to become operational by fiscal 2026.

In India, chip demand is set to grow in the medium term, driven by the increasing adoption of electric vehicles and the rising demand for feature-rich ICE vehicles.

Naren Kartic K, Associate Director at CRISIL Ratings, noted, "India currently fulfils its chip demand through imports, but the government is taking proactive steps by allocating around USD 10 billion to bolster the semiconductor ecosystem, offering incentives of up to 50 per cent of project costs to support foundry establishment. Joint ventures with established global players and the commissioning of new facilities are poised to bolster India's semiconductor capabilities."

The easing chip shortage is a promising development for the Indian automobile industry, offering the prospect of more consistent production and faster delivery of vehicles to meet the growing market demand.