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Semiconductor shortage looms large, situation in domestic market worrying

Semiconductor shortage looms large, situation in domestic market worrying

Faced with a situation where manufacturers are pursuing demand for the chips from other industries, the question comes down to how much is the automotive industry willing to adapt in a highly disruptive market dynamic

Demand for semiconductor sales from wireless communication was up 6% in 2020 and 11% in the case of personal computers, says a McKinsey report. Demand for semiconductor sales from wireless communication was up 6% in 2020 and 11% in the case of personal computers, says a McKinsey report.

The automotive industry for years has had no dearth of issues to deal with but nothing has come quite close to Covid-19 and the slowdown in demand. Just as things have started to look up, the shortage of semiconductors has only got more acute. Faced with a situation where manufacturers are pursuing demand for the chips from other industries, the question comes down to how much is the automotive industry willing to adapt in a highly disruptive market dynamic.

A McKinsey report put out this May (Coping with the auto-semiconductor shortage: strategies for success) clearly outlines the changing equation globally. Demand for semiconductor sales from wireless communication was up 6% in 2020 and 11% in the case of personal computers. That surge is understandable given the pandemic and the large proportion of the world's working population working from home. The gain made by these two segments has come at a time (and at the expense as well) of automotive which saw a sharp dip of 16%.

Also read: No big investment in semiconductor manufacturing recently, but interest rises: Industry body

There are a few points here that have swung the story for the non-automotive sectors. For one, the concept of ordering just-in-time (JIT) - or raw materials coming in just as production is set to start - was a practice institutionalised by the automotive sector. A senior industry official says there was never a need to change that arrangement. "It worked well for us and who would have anticipated Covid and the impact it had on our industry," he says with dismay. Consider the fact that Apple has made a commitment to purchase high-end semiconductors till the end of next year. Needless to say, manufacturers will happily go with that as opposed to the more difficult scenario they need to face when it comes to the automotive industry.

In the domestic market, the situation looks worrying. Over half the global production of semiconductors comes from Taiwan. Manufacturing the chips is a complex process and calls for big-ticket investments (estimated to be at least $1 billion), with the time taken to acquire expertise never less than 2-3 years. Rajiv Bajaj, Managing Director, Bajaj Auto, in a recent interview was blunt when he said his company "experienced a loss of production in August and could now lose 50% of domestic sport motorcycle volumes in September as well."

Is there a solution in sight at least in the short-term? Subhabrata Sengupta, Executive Director, Avalon Consulting says it will come down "to negotiating with fab units on how much supply they can get." To his mind, an industry wide practice to prevent hoarding would also help. Time is also of essence since newer models will need more sophisticated chips and a delay is not good news. The other option, thinks Sengupta, is insourcing or setting up capacity themselves, as the Tata group has spoken of. "It is a long-term solution and viability is doubtful since there is huge institutional learning as they come up against the big players," he sums up. As time ticks away, the industry confronts a new world order. It makes for interesting viewing.

Also read: FM Sitharaman urges industry to bring chip manufacturing to India