In the last few years, technology has become increasingly integral in passenger cars. That has, in turn, made semiconductors a key component. A shortage of these semiconductors is hitting automakers’ production as well as sales at a time there is strong demand for cars due to COVID-19 and the festive season is expected to further drive up sales.
“The domestic auto sector could continue to face supply chain headwinds, especially due to semiconductor chips shortages, over the remainder of the financial year 2022. This is likely to curtail the sales growth expected for the auto industry in FY22, particularly in the passenger vehicles (PV) segment, and also adversely impact profitability,” said Pallavi Bhati, senior analyst at Fitch-owned India Ratings and Research.
The chip shortage is a spoilsport for the automobile industry, which is seeing strong demand for cars post the second wave of COVID-19.
India Ratings now expects sales volumes in the PV segment to grow 15-18 per cent in the year ending March 2022, compared with the 18-22 per cent growth that it had forecast earlier.
The country’s largest car maker, Maruti Suzuki, had said in its quarterly analysts call that the company faced supply side issues, including global semiconductor shortage in the first quarter. Companies like Maruti have been aligning production to tide over this shortage.
“What we have been doing is adjusting our production with those variants which may not require the specific chips which are in shortage,” said Shashank Srivastava, executive director at Maruti Suzuki India.
Others like Tata Motors have even undertaken spot buying of semiconductors from the market and developing alternate supply sources. The company also built an inventory of critical semiconductor-based parts in the April-June quarter, when demand had fallen due to the second wave of COVID19 across the country.
“Semiconductor availability continues to be a focus area, so we are managing it from a war room perspective. And we are looking at almost every component where semiconductor goes in and tracking it on a daily, weekly, fortnightly, monthly basis, depending upon how important that part is or what is the inventory with us,” said Girish Wagh, executive director, Tata Motors, in a conference call with investors.
Still, supply side pressures are likely to weigh during the crucial festive season in the third quarter for automakers.
Average PV inventory at dealers was around 30-35 days at the end of July, yet the waiting time for some of the popular models in the market exceeds three months.
Furthermore, the steps taken by companies, including spot buying or pushing low-end models that don’t require semiconductors are, in turn, expected to hurt the earnings of companies.
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“The semiconductor chips shortage could affect the profitability of OEMs due to production disruption, and premium paid on procurement from existing/alternate suppliers to ensure adequate availability of semiconductor chips, and higher sales of non-premium models, which do not require the chips in shortage,” said Bhati of India Ratings.
Automakers have already raised prices this year due to a sharp rise in raw material costs and the chip shortage may necessitate another increase.
Chip shortage is a global issue currently that is affecting sales. While worldwide automobile sales are expected to rebound and grow 12 per cent in 2021, compared with a contraction of 14.5 per cent in 2020, volumes will still be well below the pre-pandemic levels, Fitch has estimated.
Given that the usage of semiconductors in automobiles is only going to increase, India Ratings expects automakers could also explore strategic investments to secure their supply chains.
