The global shortage of semiconductors will moderate India’s passenger vehicle (PV) sales to 11-13% this fiscal¹, around 400-600 basis points (bps) lower than what could have been sans the scarcity, a CRISIL Ratings analysis of India’s top three PV original equipment makers (OEMs or vehicle makers) with a combined market share of ~71% shows.

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.

For OEMs, the shortage has led to production losses, while for customers, the waiting period for some models has increased from 2-3 months to 6-9 months.

Pandemic induced uncertainties led to sharp swings in orders by OEMs, which account for 10-12% of global chip demand². This led to chip makers diverting their supplies towards other sectors such as consumer electronics which saw significant surge in demand, especially during the stay-at-home period of the pandemic. Poor inventory planning by OEMs, 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.

Says Anuj Sethi, Senior Director, CRISIL Ratings, “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.”

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 (51% of sales in the first half of this fiscal vs 42% in the first half of last fiscal) from mid-segment vehicles including sedans, and prioritising the production of premium PVs, which, too, are seeing strong demand. Some OEMs are even removing features from certain models, to conserve chip usage.

Says Mayuresh Korde, Team Leader, CRISIL Ratings, “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. 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.

¹ After the second wave, CRISIL had forecasted a PV volume growth of ~16-17% for the current fiscal
² Sources: World Semiconductor Trade Statistics, Semiconductor Industry Association