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Teji Mandi Explains: How semiconductor shortage is playing a spoilsport for auto industry

04:27 PM Jul 20, 2021 | Teji Mandi

If you have booked a new car for yourself in 2021, it is unlikely to be delivered to you on time as car manufacturers are struggling to meet the demand.

The entire global automobile industry is struggling with the shortage of semiconductors since the start of FY22. The issue has become even more serious as the supply-side has failed to meet the demand due to global economic recovery. And, the worst part is, there is no immediate end in sight of this issue.

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Acute Semiconductor Shortage

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For automobiles, the issue of semiconductor shortage couldn't have come at the wrong time. The industry was receiving positive reports about new bookings post the second covid wave. And, dealers were reporting high pent-up demand post-second covid wave.

However, the shortage issue has severely curtailed the industry's ability to cater to the high demand. A case in point is a recent commentary from Tata Motors. The company recently reduced its production estimate by 1,02,000 units for FY22, citing the issue of semiconductor shortage.

The industry sees the problem persisting at least till the end of FY22.

With manufacturing taking a hit, the waiting period is likely to get longer for end buyers. The manufacturing cost is also likely to go up sharply as prices of semiconductors are likely to go up due to the supply constraint.

The disruption has come at a time when the auto industry is already facing cost headwinds due to the elevated cost of commodities. It will eventually force automakers to take a hit on their margins or, further increase the price of their vehicles.

Closing Comments

A recent report suggests that around 169 industries are staring at a massive disruption due to the lack of semiconductor availability. It includes major consumption-backed industries like consumer appliances and smartphones.

The problem is even acute for India as it depends entirely on imports for its semiconductor needs. The Indian government has recently declared a PLI scheme to attract investments into chip manufacturing.

Over 20 semiconductor manufacturers have reportedly submitted a proposal to set up the factory to produce semiconductors. However, India's dependency on the global supply chain is unlikely to reduce immediately as it would take at least two to three years to build new plants.

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