CHIPS CUT OUT THE FLAB

about 19 days ago
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Vivek in USA had booked a new car three months ago. He was promised delivery in 15 days. He rented a car and till date, he continues to drive the same rented car while his car is yet to come. The dealer says that it could take some more time, maybe a couple of months even.

Car dealers in USA are not taking new bookings as they are currently overbooked and they say that the backlog and the new bookings will take six months to get cleared. Automobile companies have no inventory pile up any more but not much production is happening as a very small but crucial ingredient – the tiny semiconductor is simply not available. This is like the ant taking out the mighty elephant as these chips are the size of a Rs.10 coin and they have brought the entire auto sector across the world on their knees.

And this is not happening just in USA; its all across, like the pandemic. Tata Motors, subsidiary, Jaguar and Land Rover (JLR), two days ago, issued a profit warning for the forthcoming quarters on ac­count of the severe shortage of semiconductors. The company said volumes in Q1 and Q2 would be around 25% and 50% lower than original plans. It expects both quarters to report an EBIT loss and a negative free cash flow to the firm (FCFF) of approximately GBP 1 billion each. Its not just JLR; prior to that BMW, Mercedes-Benz AG, Audi AG, all issued a similar warning about a lower output.

So, what has caused this semi-conductor chip shortage since Dec?

Demand for personal devices soared due to the pandemic, leading to a such a huge surge in demand that companies could not simply scale up to fulfill the demand. The very same demand persisted into Q1 too, leaving a huge gap between demand and supply.

These chips are tiny transistors made from silicon, found in most of the minerals on the earth's surface, allowing computers, smart phones, appliances, vehicles and other electrical devices to function. One car part could use 500 to 1,500 chips depending on the complexity of the part. Major part of the raw material comes from Japan and a huge plant, Renesas caught fire in March, exacerbating the situation further and it is only by end of July or early August that its production is expected to return to normalcy.

In India, Mahindra & Mahindra has said it is factoring in some delays in the launch of its flagship Mahindra XUV500 and its new Scorpio. Bajaj Auto’s production of premium motorcycles has been hit while Ford said that its plants at Chennai and Gujarat are facing supply issue. Maruti said that because it has such a large range of cars, it is altering its production pattern to work around the current semi-conductor chip crisis. Ashok Leyland too has raised the red flag. Even here, the waiting period of delivery of a car has gone up to around 2 months.

The chip makers are stepping up capacity but that will take a while. So, we are looking at things getting back to normalcy only by end of the year. Those in the industry say that the chip making supply chains are pretty inefficient and even if production does get normal, it could take months to reach the end product. Third quarter of 2021 is when chips will start rolling and first half of 2022 is when all issues could get resolved.

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