Waiting Period for Vehicles Rising on Production Constraints Caused by Chip Shortage: Report
Moneylife Digital Team 26 October 2021
The global shortage of semiconductors will moderate India’s passenger vehicle (PV) sales to 11%-13% this fiscal, around 400-600 basis points (bps) lower than what could have been sans the scarcity, a CRISIL Ratings analysis of India’s top-3 passenger vehicle (PV) original equipment makers (OEMs or vehicle makers) with a combined market share of about 71% shows.
In a report, the ratings agency says that the chip shortage has led to production losses for OEMs, while for customers, the waiting period for some models has increased to six to nine months from two to three months.
The COVID-19 pandemic-induced uncertainties led to sharp swings in orders by OEMs, which account for 10%-12% of the global chip demand. This led to chip-makers diverting their supplies towards other sectors such as consumer electronics, which saw a significant surge in demand, especially during the stay-at-home period of the pandemic. 
OEMs' poor inventory planning, chip hoarding by Chinese companies, and natural disasters affecting major chip factories further exacerbated the problem. Besides, logjams at ports have also affected shipment of chips this fiscal, CRISIL says.
Semiconductors, also called chips, are crucial components of vehicles that facilitate a wide array of features such as navigation, infotainment and traction control. Premium cars with advanced safety and entertainment features need more chips compared with the base models.
Anuj Sethi, senior director of CRISIL Ratings, says, “Since the pandemic began, preference for personal mobility has increased, leading to more-than-expected demand for PVs. Besides, consumers have also been preferring vehicles with more electronics-driven features, or a higher semiconductor quotient. The upshot of the chip shortage has been PV production cuts, which will have a bearing on the ongoing festive season as well when sales are typically higher. Consequently, we foresee tempered overall growth for PVs this fiscal.”
According to the ratings agency, the chip dearth is expected to continue well into the first quarter of next fiscal with capacity addition not keeping pace with demand, and long lead times of 12-18 months to set up a greenfield facility. 
To be sure, OEMs are doing what they can, such as diverting chips to high demand segments such as utility vehicles from mid-segment vehicles including sedans, and prioritising the production of premium PVs, which, too, are seeing strong demand. Utility vehicles sales increased 51% during the first half of this fiscal compared with 42% in the first half of last fiscal.
Some OEMs are even removing features from certain models, to conserve chip usage.
Mayuresh Korde, team leader at CRISIL Ratings, says, “Besides the impact on operating leverage stemming from production losses, higher metal prices could also dent operating profitability of OEMs by 100-150 bps to 6.5-7% this fiscal. However, their credit profiles will remain stable driven by still healthy cash flows, strong balance sheets and robust liquidity.”
The paucity of chips is leading to sharp scrutiny of supply-chain management at OEMs, the rating agency says, adding, sourcing of such crucial imported components is vital to continuous production of vehicles. 
“It is imperative, therefore, to improve inventory planning by changing the sourcing policy from just-in-time to a longer order period. And more so since intensifying competition will make more chip-driven features a crucial differentiator for PVs,” CRISIL says.
Free Helpline
Legal Credit