Synopsis–As these chips are now an integral part of almost all gadgets and equipment, the ripple effect has affected electronics, consumer durables and almost every other industry.
For an industry that prides itself in being at the forefront of technological development, semiconductor makers have been unable to stay ahead of the curve. The result: a global shortage in semiconductors. As these chips are now an integral part of almost all gadgets and equipment, the ripple effect has affected electronics, consumer durables and almost every other industry.
The automobile industry seems to have taken the biggest hit. There have been reports of up to six months’ delay in delivery in some cases, and of cars being delivered without infotainment systems because the chips that go into making them smart were not available.
Globally, Toyota had to slow production, General Motors and Fiat Chrysler have temporarily closed some units and Volkswagen is facing production delays because of a manufacturing problem in the $400 billion semiconductor industry.
But how did the world suddenly face a semiconductor shortage? Due to Covid-19.
Semiconductor companies like Qualcomm, MediaTek, Nvidia, Infineon, ST Microelectronics design chips in the US, Europe and at R&D hubs in India. The designs are mostly sent to foundries in China and Taiwan, South Korea and Israel. As coronavirus gripped China, the largest manufacturer of semiconductors, these factories were shut. This hit semiconductor manufacturing.
Rajat Mahajan, partner, Deloitte India, says geopolitics also added to the trouble. “It all started last March when the US flagged some Chinese semiconductor companies. It triggered a shortage and started impacting related sectors. This is likely to go on for another year or so.”
Earlier, the lead time to order semiconductors was 16-26 weeks. However, now, with the shortages, the lead time has been stretched to 52 weeks.
Then a second wave of shortage hit the semiconductor industry as the world started relaxing the pandemic lockdowns. “The industry was caught unawares by an unexpected increase in demand for home networking devices, laptops and computers,” says Bengaluru-based Vivek Tyagi, founder & CEO, ProVT Consulting. “The chip foundries that opened up focussed on this demand. So the auto sector is facing a shortage.”
The automotive industry, which is lower in the semiconductor supply pecking order, is rethinking its supply chains and talking with suppliers as well as chip vendors to resolve the shortage. Car companies are also identifying alternative sources to keep the production lines running.
“This is a wake-up call for the entire auto industry,” says Thomas Flack, president and chief purchasing officer of Tata Motors. “We must have better visibility across our multi-tier supply chain to manage lead time sensitivity. This calls for re-modeling supply chains, adopting digital solutions and using right analytics as the way forward.”
A procurement officer who did not wish to be identified says automakers are reconfiguring their manufacturing process to keep production lines moving. For instance, consider a part that requires four sensors with microchips. Instead of using four, two or three parts are used. This helps companies deal with shortage of certain parts, he adds.
Given that today’s cars are highly automated, warns an industry veteran, this can affect product quality.
Even a mid-range car uses 25-30 semiconductors for infotainment, engine diagnostics, fuel gauges, smartphone integration to the dashboard screen and so on. Top range models use 80-100 microcontrollers to operate smart systems. In fact, the auto industry consumes 8% of global semiconductor every year. This segment alone is a $33 billion market. “Chips are enabling most innovations such as smartphone integration, display, security and performance,” says Khalid Wani, director-sales, India, Western Digital.
With such big reliance on semiconductors, the auto sector is likely to face more delays. Korean and Japanese auto majors that have stocks in their cross-country supply chains have been able to handle the shortage better when compared with Indian companies.
Automakers say January and February was a challenging time. They hope the crunch will ease in March and April. Some have created a stock of semiconductors to fulfill their immediate requirements. Semiconductors are becoming tradeable like gold, says Flack of Tata Motors. At such times, there are “floating stocks” of semiconductors that are retailed at a premium.
The situation will improve as the post-pandemic world stabilises and companies move production to multiple centres instead of relying just on China. But automakers will continue competing with more industries that are consuming chips.
The case for accelerating chip production is strong, and the case to make India a hub for semiconductor manufacturing is stronger.