Chip Shortage and its Impact on India

By Aruushi Gupta

The world is going through a major hit on the supply of semiconductors and their adverse impact on the overall world economy. Many industries in India are echoing the same sentiment, citing windfalls in their sales. The shortages brought all the technology-abled industries and devices- smartphones, tablets, computers, automobiles, and even the aviation sector to an overhaul, harboring an unprecedented crisis for the potential revival of the economy.

(Image: Business Standard)

Let’s boil down to the demand side of the fiasco. According to World Semiconductor Trade Statistics (WSTS), the global semiconductor market is projected to grow 25.1% to $ 551 billion in 2021, accelerating from a 6.8% expansion in 2020. Growth will slow down to 10.1% in 2022, and the market will hit $ 606 billion, according to WSTS, a nonprofit group of semiconductor product companies. The Asia-Pacific region is expected to grow by 27.2%, followed by Europe (26.4%), America (21.5%), and Japan (17.7%), according to WSTS forecasts.

(Source: Design and Reuse)

Speaking in terms of supply and demand, the former is not able to catch up with the latter, and the probable reasons for such disruptive behavior have arisen due to the ongoing trade war between the USA and China fuelled by the ongoing pandemic and the huge dent on supply from the world’s biggest supplier. A crippling drought in Taiwan and a fire at a large chip factory in Japan, the Renesas Electronics Naka factory, took more capacity from the market and exacerbated supply bottlenecks. Of course, the world was already experiencing a semiconductor chip shortage before the coronavirus pandemic broke out in early 2020. But when economies collapsed in the wake of global lockdowns, chipmakers began cutting production in anticipation of a drop in demand.  However, when people moved to remote work and stayed at home, they began to ask for laptops, computers, televisions, game consoles, smartphones, and other electronic devices to work and chat. This has driven demand for chips so much that the global semiconductor market is expected to grow by double digits this year and next.

Automobile Industry

The automobile industry worldwide is going through tough times, slashing productions and experiencing fall in sales. The chip shortages is considered the major reason for the same, wherein Bloomberg reports a possible $61 billion loss for automakers. Asia would be the biggest sufferer, with China and South Asia going through major setbacks. 

(Source: Bloomberg)

India’s largest automaker, Maruti Suzuki announced that their total production fell by 51% on a Y-O-Y basis to 81,278 units, citing the chip shortage (ETAuto, 2021). The below image represents Maruti Suzuki’s gradual fall in production, given shortage of chips as claimed by the firm. 

(Source: Business Standard)

The autosales are too badly affected. Maruti Suzuki India (MSI), the country’s largest automaker, reported a 33% drop in October sales to 1,08,991 cars. In October of last year, the business sold 1,63,656 units. At the moment, these shortages have pushed numerous original equipment manufacturers (OEMs) to reduce production, stretching the wait times for popular, feature-rich, and high-end models even more. Hyundai, second-largest automaker, reported a 37% drop in total sales in October, with 43,556 cars sold (Majumder, 2021).

(Source: Business Standard)

Electronics Industry

Not only automobiles, but electronics are also experiencing major hit back. The shortage of semiconductors has hampered the production of laptops, tablets, smartphones, and other electronic devices. The shortage of application processors, one of the most important components in smartphones, was caused by low prices allowing us to obtain new fab lines. As the situation popped up to worsen, it initiated a chain reaction throughout the industry. Reliance Jio, for example, has delayed its plans to launch a new smartphone due to a chip crisis, he said, adding that another issue is a container shortage and rising freight charges in China, which are also affecting margins (F.E. Online, 2021).

India imports $ 7 billion worth of integrated circuits from China, 70% of its total imports (Malik, 2021).

(Source: The New Indian Express)

Future Solutions for the Problem 

All of these challenges have resulted in business leaders demanding stronger supply chains to avoid future difficulties (Howells, 2021).

  • Improved Visibility: The best-positioned companies are those that predicted changes in demand for their products early on and ordered critical components (such as semiconductors) before the competition. This requires transparency throughout the supply chain, from chip manufacturing to testing and packaging to delivery to the customer. 
  • Identification of alternative sources of supply: To reduce risk, it is important to have a large number of suppliers in multiple regions and even on land that has current contracts. An example of this is Intel’s commitment to invest $ 20 billion in Arizona to open new semiconductor factories. 
  • Improved collaboration with a corporate network: Visibility and collaboration with vendors, contract manufacturers, logistics providers, and other business partners can help build relationships with key vendors such as chipmakers and help secure supplies. 
  • Integrated business planning processes: The ability to track leading indicators, identify changes in supply and demand, and rapidly simulate, reprogram, and execute alternative strategies can make a big difference in responding to a business risk or opportunity to create a robust supply chain.

Conclusion

The shortage in semiconductors highlights the alarming situation of complete dependence on one supplier and associated economic losses that major emerging industries might face. The manufacturing capacity needs to be augmented along with diversification of the distribution channels. This is an opportunity for all the countries, especially for India, given the labour and cost advantages. 

References: 

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