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Explained: How chip shortage is impacting automakers and when will the crisis be resolved?

Explained: How chip shortage is impacting automakers and when will the crisis be resolved?

Explained: How chip shortage is impacting automakers and when will the crisis be resolved?
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By CNBCTV18.com Aug 30, 2021 8:31:29 PM IST (Updated)

Globally, auto companies are hit hard by the chip shortage because cars are run by software, some having more than 3,000 chips. EVs are also chipset-based. In India, the impact is not yet so acute but this will change as the country moves towards a BS-VI regime.

There is an acute shortage of semiconductor chips worldwide and the auto industry is feeling the heat. The shortage of chips has already affected global vehicle production. Manufacturing estimates suggest that the global auto industry may produce fewer numbers -- in the range of 6.3 to 7.1 million vehicles this year.

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A report by IHS Markit says the chip crisis will drag till the second quarter of 2022 as Malaysia is experiencing extended lockdowns due to the surge in the COVID-19 cases. Malaysia hosts many back-end chip packaging and testing operations.
The chip shortage may last until 2023 and would impact at least 169 industries, according to Goldman Sachs.
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Why chips are indispensable?
Globally, automobiles are run by software and electronic parts, with some having more than 3,000 chips. A car’s music system, touchscreens, power windows, and even remote key modules use semi-conductors. The electric vehicles made today are also chipset-based.
In India, the impact is not yet felt compared to other markets like the US, Europe or rest of Asia, as entry level vehicles do not have too many electronic parts. This will change as India moves towards a BS-VI regime.
Why the shortage?
Globally, components and spare parts are manufactured in many countries and assembled in a different country. Car manufacturers have followed the concept of placing orders for their components well in advance based on their production schedules. As there was a supply glut in the past, carmakers reduced their orders and the pandemic led to a further drop in sales.
What these carmakers did not expect was a sharp rise in demand for cars as the general population preferred to travel in their own vehicles to maintain social distancing. Also, many countries had banned public transportation. This resulted in a demand for cars which was totally unexpected, and chipmakers were unable to fulfil the rising orders.
Who makes these semiconductors?
US-based Intel Inc, Nvidia Corp and Qualcomm Technologies Inc are the three leading chip makers apart from South Korea’s Samsung and SK Hynix. The Taiwan Semiconductor Manufacturing Co of Taiwan is another chip maker that supplies to every car maker in the world.
How will this affect India’s automakers?
Despite ramping up production, chipmakers still find it difficult to cope with the unexpected demand. In India, Suzuki Motor Corp has already announced production cuts at its Gujarat plant. Work is limited to one shift and production was suspended for three days in August.
Hyundai Motor and Mahindra and Mahindra too have faced production issues while Daimler had cut working hours in April for some staff and also temporarily stopped production at some plants. BMW too reduced its output to offset the shortage of chips.
Retail sales had seen a gradual pickup after lockdowns were eased in the country. The onset of festivals is also expected to boost sales and enquiries are already on the rise. But the chip shortage is forcing companies to cut back on production.
India in DIY mode
The Ministry of Electronics and Information Technology is actively seeking foreign capital to set up semiconductor manufacturing facilities in the country and more than 20 chipmakers have submitted expressions of interest (EOIs).
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