Coming out stronger: How auto industry is managing the global chip crisis – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/coming-out-stronger-how-auto-industry-is-managing-the-global-chip-crisis/articleshow/88905305.cmsSynopsis

Semiconductor shortage has come at a time when cars are witnessing rising electronic content, which is driven by several aspects ranging from competitive bundling of smart connectivity features to statutory requirements such as the BS-VI emission norms. The onset of electrification and hybridisation of vehicles across the spectrum will further add to the surge in demand for chips.

Sunjay Kapur

Sunjay Kapur

President, Automotive Component Manufacturers AssociationThe auto components industry has experienced very challenging business cycles in the last few years. Auto components suppliers invested heavily in new technologies to be ahead of the introduction of Bharat Stage VI emission norms in April 2020. But that was also the time when the Covid-19 pandemic was beginning to spread in India, and a three-month long lockdown came into play. Auto suppliers sustained a quarter of almost no revenues.

Although the industry saw a sharp recovery later on account of pent-up demand, it soon ran into several supply-side gaps with semiconductor shortage becoming the biggest hurdle. The automotive manufacturing is so deeply integrated that a shortfall of a single component has the potential to bring the whole assembly line to a halt, directly impacting the entire supply chain.

Semiconductor shortage has come at a time when cars are witnessing rising electronic content, which is driven by several aspects ranging from competitive bundling of smart connectivity features to statutory requirements such as the BS-VI emission norms. The onset of electrification and hybridisation of vehicles across the spectrum will further add to the surge in demand for chips.

Consumption of semiconductors in vehicles has already risen from 7% to 10% over the recent past. This is expected to further rise to 20% over the next 3-5 years. This is indicative of how disruptive the automotive industry is going to be in the near term. The Automotive Component Manufacturers Association (ACMA) estimates that the auto components industry alone has sustained an opportunity loss of more than ₹1,000 crore in 2021, which is single-handedly attributable to the persisting chip shortage problem.

Bangalored? No, Siliconed
The auto industry has been the worst hit among all industries in the ongoing global chip shortage. This can be partially attributed to the fact that the industry, which relies heavily on procuring components from the most competitive sources, was never the primary customer for the chipmakers. To add to that, the chips typically deployed in cars aren’t the most advanced and, as a result, are low on margins when compared to the ones used in high-end consumer electronics, medical devices and other items. That also explains where the automotive customers stand in the priority list of the chipmakers as they expand and block their capacities.

However, this is rapidly evolving, thanks to the global transition to electric and autonomous vehicles. Prolonged chip shortage will potentially hurt the new product pipelines for all automakers globally at a time when original equipment manufacturers (OEMs) are in a rush to launch newly electrified and connected vehicles. In other words, vehicle manufacturers who secure adequate chip supplies early will have a clear upper hand.

Globally, carmakers are already signing partnerships with the chipmakers to secure supplies early. For example, Ford has partnered GlobalFoundries to not just secure supply of chips but to also explore joint development of automotive semiconductors. Similarly, Stellantis has partnered with Foxconn to create four new families of chips that will cover over 80% of their future semiconductor requirements. Meanwhile, General Motors (GM) is also consolidating core microprocessor chip purchases into specific families, aiming to reduce the number of unique semiconductors it uses by 95%.

The industry appreciates GoI’s approval of the ₹76,000 crore incentive package to create and support the semiconductor ecosystem in India. Semiconductor manufacturing must be a 20-year, public-private partnership (PPP) project as it entails several billion-dollar worth of investments. That said, while this would significantly contribute to solving the chip crisis in the long term, the supply shortage is expected to continue to impact the components industry in the near to mid-term.

The auto components industry has recorded an impressive year-on-year recovery in H1 FY2022. But H2 of this fiscal will bear the brunt of the persisting semiconductor supply challenges. The chip shortage is expected to linger over the next fiscal year, too, while gradually gaining stability every quarter.

Chipped No More
Although close to 65% of ACMA members are MSMEs, most suppliers are willing to make new investments in the context of the new production-linked incentive (PLI) schemes. The fundamentals of the automotive components industry are stronger than ever before, as a lot of large businesses are either low on debt or debt-free. This underlines that the sector has the capacity to make new investments in capital expenditure.

Almost 60% of ACMA executive committee members are ready to supply competitive products to the budding electric vehicle (EV) industry. The remaining 40% say they will be ready in the next two years.

Even with the challenges ahead, auto components suppliers have only come out stronger from the Covid-19-led challenges.

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