Recent news has highlighted an unusual shortage of inputs, particularly semiconductor chips, causing vehicle manufacturers in India, including car and premium bike producers, to scale back production across all categories. This article provides a detailed examination of this issue, focusing on the nature of semiconductor chips, the reasons for the current shortage, and its impact on various industries, most notably the automobile sector.
Understanding Semiconductor Chips
Semiconductors are materials that possess conductivity levels between those of conductors, generally metals, and non-conductors or insulators, such as most ceramics. They can be composed of pure elements like silicon or germanium, or compounds such as gallium arsenide or cadmium selenide.
The measure of how easily an electric charge or heat can pass through a material is known as conductivity. An electronic circuit with numerous components like transistors and wiring formed on a semiconductor wafer is referred to as a semiconductor chip.
These chips are essential to Integrated Circuits (ICs), which are found in various electronic devices including computers, smartphones, appliances, gaming hardware, and medical equipment. Today, electronics parts and components constitute 40% of a new internal combustion engine car’s cost, up from less than 20% two decades ago. The rise in this percentage is largely attributable to semiconductor chips.
Reason for the Current Chip Shortage
The Covid-19 pandemic and subsequent global lockdowns, which resulted in the closure of key chip-making facilities in countries like Japan, South Korea, China, and the US, are primarily responsible for the chip shortage. This scarcity has a domino effect because the initial lack creates pent-up demand which subsequently leads to further shortages.
Another factor contributing to the shortage is the exponential increase in chip consumption. In recent years, the number of transistors mounted onto IC chips has doubled every two years. This growing demand for chips is also partly due to the rising contribution of electronic components in a car’s bill of materials.
Impact of Shortage on Various Industries
The essential consumers of semiconductor chips, primarily car and consumer electronics manufacturers, are unable to receive enough of this vital input to maintain production. The measure of chip shortage is referred to as ‘chip lead time’, which is the interval between placing an order for a chip and its delivery.
Because vehicle manufacturers have traditionally relied on just-in-time delivery systems, keeping low inventory levels while depending on the electronics supply chain to meet production line needs, this shortage has led to reduced automobile production. Moreover, some companies reportedly temporarily discard features and high-end electronic capabilities to manage the chip scarcity, delaying vehicle deliveries.
Possible Remedies and the Way Forward
Although the current slump in the automotive industry appears temporary, it does require immediate attention and solutions. As vaccination drives continue and economic recovery progresses, these actions should provide the necessary catalyst.
In the interim, it’s crucial to reduce the Goods and Services Tax (GST) on entry-level cars and two-wheelers. Additionally, state governments should consider decreasing road tax to support the industry during this challenging period.