Chip Shortage Affecting Passenger Vehicles More; Ownership Costs Up
Due to the short supply of semi-conductor chips, auto-makers from across the globe are downsizing production. Many original equipment manufacturers (OEMs) like Mahindra & Mahindra Ltd (M&M), Maruti Suzuki India Ltd, MG Motor India Pvt Ltd and the Renault Nissan Alliance have either cut down production of passenger vehicles (PVs) or are opting for selective plant shutdowns due to chip shortage. Rating agency CRISIL sees the chip shortage to continue up to March next year.
 
Hetal Gandhi, director at CRISIL Research, says, “With COVID cases in Malaysia reaching 22,000 per day by the end of August this year, from around 1,500 cases per day by the end of March, lockdown measures in the country are expected to dent the supply of microchips, aggravating the shortage further. Unfortunately, this coincides with the automobile industry entering the crucial festival period of sales. We expect cars and utility vehicles (PVs) to be more impacted as compared to the two-wheeler sector where dealer inventories are presently higher.”
 
“Our previous estimate for volume growth in fiscal 2022 for passenger vehicles stood at 15-19%, which could see a downside by 200 basis points (bps) due to the ongoing chip shortage, our growth for two-wheelers for the same period stands at 8-10% factoring in the current situation,” she added. 
 
Although the semi-conductor shortage is likely to remain until the end of fiscal 2022, the ratings agency expects the situation to improve marginally in the coming two to three months once the curbs in Malaysia are lifted. 
 
Further, Ms Gandhi says, “we do not foresee a significant impact in the sales of tractors, three-wheelers and commercial vehicle segments due to the chip shortage, because of lesser usage of such parts in these vehicles.”
 
The COVID pandemic has brought forward supply chain weakness in semi-conductors. The chip shortage has affected auto-makers and PC, mobile and other electronic devices-makers, making it challenging to manage an increase in demand and reduced production. In fact, last month Pat Gelsinger, chief executive officer (CEO) of Intel said the massive chip shortage will continue for at least two more years before the industry can completely catch up with the demand. 
 
While almost all major mobile brands struggle to secure critical components to produce devices to meet demand, Apple appears to be in a more comfortable position. A report from Wave7 Research indicates that the shortages affect makers of lower-cost Android handsets, with Samsung and OnePlus being particularly hard hit. However, the scarcity does not appear to affect Apple iPhone, Mac, or iPad as significantly.
 
According to International Data Corporation (IDC), supply constraints will continue through 2021. “While shortages initially occurred in automotive semi-conductors, the impact is being felt across the board in semi-conductors manufactured at older technology nodes,” it says. 
 
Coming back to chip shortage and its effects on the Indian auto industry, according to CRISIL, Malaysia holds a critical link in the global semi-conductor supply chain, with many assemblies and testing centres located in the country. 
 
With fuel prices breaching the Rs100 barrier, vehicle users in India are looking for other options like vehicles running on compressed natural gas (CNG), hybrid cars and electric vehicles (EVs). The global chip shortage has affected these vehicles too. 
 
According to a report from Environmental Science & Technology, hybrid cars are twice as vulnerable to supply chain issues as conventional fuel-powered models, and self-charging hybrid and plug-in hybrid vehicles have twice the raw material cost risks. 
 
The most significant contributors to the increase in cost risks were: battery-related elements, such as cobalt, nickel, graphite and neodymium; however, changes to the exhaust and transmission systems in hybrid vehicles reduced the impact of palladium and aluminium, respectively, says Randolph Kirchain, principal research scientist at Massachusetts Institute of Technology (MIT).
 
Ms Gandhi from CRISIL says, “With petrol prices breaching the Rs100 mark in various states and diesel following the trend, we see consumer interest migrating to other fuel types like CNG as well as electric vehicles-EVs.” 
 
“For buyer segments where fuel accounts for a significant portion of expenses like taxis, two-wheelers used for deliveries, these could see an earlier migration towards electric vehicles or CNG as applicable. The shift will need to be supported by the enabling infrastructure of the electric charging station and the city gas distribution (CGD) network in the case of CNG. We see this happening gradually over the next few years, but higher fuel prices are expected to accelerate this shift,” she added.
 
During August 2021, Indian auto-makers reported healthy sales numbers, despite high fuel cost and shortage of electronic components. 
 
Last year, the pandemic-triggered national lock-down from late March 2020 had a massive impact on the sector. However, this year lock-downs were more regional in nature but imposed fewer restrictions.
 
Nevertheless, high fuel costs along with shortages of electronic components hampered sales and elongated waiting periods.
 
Last month, Vinkesh Gulati, president of the Federation of Automobile Dealers Associations (FADA), pointed out supply constraints and increased waiting periods for delivery of vehicles.
 
“The global semi-conductor shortage is now becoming a deep routed problem for the PV segment, which is now above the pre-pandemic mark. FADA has been raising a red-flag for quite some time on demand-supply mismatch.” 
 
“In an internal survey conducted by FADA (in July 2021), 60% of the dealers of PV segment said that they have at least two months’ waiting period for select variants. About 35% of dealers also said that the waiting period is more than four months among select variants. The waiting period due to supply-side constraints have been persisting for quite a few months and is now becoming a deep routed issue for OEMs,” the FADA president added.
 
M&M says its automotive division continues to face a shortage of semi-conductor supply, “which has got further accentuated due to the COVID-induced lockdowns in some parts of the world.”
 
The company estimates a reduction in production volumes by 20%-25% due to the ‘no production days.’ “The revenue and profitability will be impacted in line with the fall in production volumes. The company is taking various cost optimisation measures to limit the impact,” M&M says in a regulatory filing.
 
Maruti Suzuki, the country’s largest carmaker, says its contract manufacturer had decided to halt production on three Saturdays in August. In a regulatory filing, it says, “owing to the semi-conductor shortage situation, the Company has been informed by its contract manufacturing company, Suzuki Motor Gujarat Pvt Ltd (SMG), that production will be partially impacted in this month.”
 
Globally, various industries, including consumer durables and automobiles and other sub-segments, face semi-conductor or electronic chip shortages due to high demand. COVID induced lockdowns have impacted the supply of semi-conductors across the world. 
 
At the same time, India is witnessing an increase in demand for electronic devices and automobiles. However, with chip shortages affecting production, consumers will have to shell out more to buy these things, especially during the upcoming festival season. 
 
RC Bhargava, chairman of Maruti Suzuki, rightly pointed out the increase in car ownership cost due to taxes and new regulations. Speaking at the annual convention of the Society of Indian Automobile Manufacturers (SIAM), he had said, “New regulations like Bharat Stage (BS)-VI have added Rs22,000 to the cost of an entry-level car like Alto and Wagon R. This,
coupled with taxes imposed by states, have made the increase substantial for a price-sensitive customer. Our focus should be on how to make the vehicles affordable to the masses. If the affordability factor is addressed, then the Indian auto industry can certainly recover in the short term.”
 
However, due to higher input cost pressure, Maruti Suzuki has decided to increase the prices of select models with immediate effect. The weighted average price increase in ex-showroom prices at Delhi across select models of Maruti Suzuki is 1.9%.
 
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