India’s auto sector is facing a tough time because of the shortages of semiconductor chips, according to the report generated by India Ratings (Ind-Ra).
The chip shortage is going to curb down the sales growth expected for the auto industry in FY22. The passenger vehicle segment is going to be the worst affected. Ind-Ra is expecting that this shortage will continue until end-1H22.it is also expected that the original equipment manufacturers (OEMs) are going to reassess their supply chains so that they can diversify their raw materials.
It is observed that as there has been an increase in electronic content in vehicles, the demand for semiconductors also increased for automatic headlamps, parking sensors, anti-lock braking systems, instrument gauges, and infotainment systems. In order to reduce the burden on semiconductors, OEMs are trying to prioritize the use of chips in their more profitable models. Due to the shortage, PV OEMs like MG Motor India Private Limited, Maruti Suzuki India Limited, and the Renault Nissan Alliance have either reduced the production or taken selective plant shutdowns. Ind-Ra has revised down the expected sales volume growth in the PV segment to 15-18%. It is believed that the shortage of chips can affect the finished vehicle inventory levels and can cause pressures on the supply side during the festive season. OEMs on the other hand are trying to keep higher stock at the dealership level.
It is also seen that India is highly dependent upon imports to meet its requirement of chip semiconductors. The government has come up with schemes like the Scheme for Promotion of Manufacturing of Electronics Components and Semiconductors (2020) and the Production-Linked Incentive Schemes (2020-2021) so that it can focus on electronics manufacturing. These initiatives by the government will create a favourable environment for wide-scale electronics manufacturing in India, said Ind-Ra.
According to an article published in McKinsey, the capacity of the global semiconductor industry has increased by 4% annually and the CAPEX growth in the global chip fabrication capacity is also expected to increase between 16-23%. The increasing importance of semiconductors in the manufacturing field has been recognized by the government all over the world.
Since the beginning of 2021, auto OEMs, are facing a shortage of semiconductors. Many OEMs are trying to manage production by focusing on efficient resource allocation and following a centralized purchase policy. According to Fitch Solutions Ltd, global vehicles sales will grow by 12%. However, the sales volume will remain quite low in comparison with the pre-pandemic levels because the industry is still facing risks like disruptions in the supply chain.
Source – India Ratings & Research
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