Had this been a regular year, the festive season of Diwali would have continued to bring immense business opportunities to the carmakers. Considered the most auspicious time of the year, it was almost guaranteed that we would have queued to take delivery of the coveted vehicle of our choice. While the consumer demand still sustains its upward swing, the current situation finds carmakers facing a tough time trying to meet the delivery timeline.

The time between booking a car and having it delivered has increased exponentially. What earlier used to be a matter of weeks has now stretched to over a few months. This massive delay is primarily a result of the government imposed lockdowns to contain the COVID-19 pandemic.

 As the world adjusts to the ‘living with the virus’ era, our economies are still playing catch up with the halted supply chains that are still struggling to be back at total capacity. Experts claim we’d take longer than expected to make our way back to regular operations. Until then, we have no choice but to live with the virus and the resultant global supply crisis known as the semiconductor chip shortage.

What is a Semiconductor Chip?

A semiconductor chip is a computing chip made of silicon, cobalt, copper that essentially carries out a number of functions, including computing, network routing, storage, memory, sensors, and even biological analysis function for the device it gets installed in. Upon manufacturing, they hone the form of an electric circuit with components such as transistors and wiring. These semiconductor chips form the basic building blocks of computation and the modern world in layman’s terms.

In the 1950s, scientists in the U.S. came up with the first silicon transistor (tiny electronic devices that run computations inside a computer). Before that, scientists had to make do with vacuum tubes that were slow and took up extensive space. But the advent of these silicon-based semiconductor transistors miniaturised devices into the shape we see them in today, like our compact smartphones and laptops.

 The 21st century is gradually becoming an all-digital space, with almost every component being run electronically. And these semiconductor chips power everything that we buy and use, such as smartphones, televisions, refrigerators, cars, planes, while also powering the factories that make these devices in the first place. So if you think the world is getting eaten by software, these chips would be the teeth in that mouth.

Use of Semiconductors in Cars

If the mechanical components in a car aid acceleration and braking, these semiconductor chips power the auxiliary functions of a modern car. These secondary functions comprise safety systems such as rear-view cameras, airbag deployment, ABS and driver-assistance systems like navigation, blind-spot detection, adaptive cruise control, lane change assist, and emergency braking system.

 Even the in-car entertainment systems, including the likes of Bluetooth, audio systems, touchscreen, and ambient lighting, get powered by these semiconductor chips. One could further thank these chips that allow the entire suite of smartphone connectivity functions to operate, such as wireless audio playback and phone contact sharing, making a modern driver’s life much easier. Speaking of easier, the ever thorny problem of calculating mileage and remaining litres of fuel now gets done in an instant, no, every instant, thanks to these chips that power the powertrain components such as the ECU for efficient operation of the vehicle. These onboard computers have to process millions of lines of code every second, and the chips provide the computing power to allow cars to stay connected in real-time. Without these chips, cars would be sheets of metal conjoined with wheels that enable transportation without conforming to any safety norms.

But all that is set to change with the arrival of electric and interconnected cars. The entire load of the powertrain, which previously got borne by mechanical components, would now fall upon the prowess of these chips. A modern car is said to house more than 3,000 chips. So, one can imagine that number getting exponentially multiplied when it comes to electric cars and their accompanying connected features, all powered by electricity and these electric-conducting semiconductor chips.

What triggered the semiconductor chip crisis?

One of the more obvious and evident reasons is the COVID-19 pandemic. The consequent lockdown for months forced the masses to work from home, which led to the advancement of domestic digitisation. The demand for devices such as laptops, smartphones, speakers and smart television started to see a steep spike while car manufacturers were forced to shut shop.

Now, as mentioned earlier, the semiconductor chips are the basic building blocks in most modern electronic appliances, including the likes of smartphones, laptops and refrigerators. Hence, consumer electronics hog the majority of the global semiconductor chip production, while the automotive sector accounts for a mere five to nine per cent. As the demand for the former superseded that of the automobile sector, a bigger chunk of semiconductor chips got rerouted, leading the automobile factories to face a supply void even before production resumed.

The panic-inducing pandemic further propelled the majority of the carmakers to cancel all supply chain orders due to a production halt. Plus, the fear of contracting the airborne virus practically eliminated the entire ridesharing industry as everyone wanted a slice of personal mobility, raising the demand for cars once the lockdown restrictions were lifted. While the cancelled chip supplies helped OEMs minimise their losses during the first wave, the auto sector failed to foresee a massive demand spike in the immediate future. It was too late for OEMs to recuperate as the auto factories didn’t possess enough semiconductor chip inventory to cater to the heightened demand.

The USA houses the majority of semiconductor chip designer companies such as Intel, Qualcomm, and Nvidia, but their manufacturing facilities are mostly based in South Korea, Japan, Europe, and Taiwan. The biggest of the lot is TSMC or Taiwan Semiconductor Manufacturing Company, one of the world’s largest dedicated semiconductor foundries since 1987, with client products ranging from microwaves to fighter jets and even NASA’s other-planetary rovers. Yet, the firm’s most important customers are smartphone companies, as they account for half of TSMC’s overall sales.

Plus, the smartphone output dwarfs the automobile sector output by a massive margin (1.4 billion smartphone units compared to 93 million vehicles in 2019). Hence, one can assess which sector must’ve got a preference for silicon chips at the hour of need. Not to forget the added demand for domestic digitisation during the first wave. Hence, the long wait time on car deliveries meant a prospective car owner wasn’t just fighting with other potential car owners: he was at war with the prospective laptop owners, smartphone owners, gaming console owners to procure delivery of his four-wheeler.

But the extreme demand for consumer electronics wasn’t the auto sector’s Achilles heel. Instead, it was the short-sightedness within their supply chain that left them exposed and vulnerable. Part of the reason is the short term commitments made between auto OEMs and semiconductor chip manufacturers in their regular supply chain. On average, most auto OEMs maintain short term commitments of anywhere between a few weeks to three months for procuring these chips from producers. In contrast, consumer electronics makers maintain commitments stretching up to a year. This implies that the chip manufacturers’ order book remains brimful of sustained smartphone chip demand, entailing a much quicker turnaround time for any delayed discrepancies. But the automakers don’t have the same extended cushion to rely on, leaving them dead in the water.

Additionally, placing semiconductor chip orders isn’t the same as placing an order on Swiggy. The chip lead time or the difference between booking chips and having them delivered ranges from six months to a year for auto companies. The breakdown involves a manufacturing period of about three months and another three to five months for fabrication and packaging, rendering it ready for installation. Plus, orders for these chips have to be placed about a year in advance, and it was this crucial time frame that the pandemic robbed the auto industry of, exposing the vulnerabilities in its supply chain during emergencies.

If the pandemic wasn’t enough to disrupt the global supply chain, facilities involved in the chain were also struck by artificial calamities. For instance, the Renesas Electronics Corporation in Japan, the maker of nearly one-third of the microcontroller chips used in cars around the world, suffered a fire outbreak in one of its chip manufacturing facilities in March earlier this year. This further delayed operations for global carmakers but didn’t dent the supply chain significantly as the Japanese facility was able to bring back its production capacity to 95 per cent by June 2021. Yet, the resultant delay was enough to prolong the issue of scarcity.

Moreover, with every passing day and added functionalities like over-the-air software updates, cars increasingly resemble computers. That entails a larger need for semiconductor chips to manufacture a modern car, which is like rubbing salt to injury in its current condition. And the future prospects aren’t much better, as forthcoming electric cars will rely even more on these chips to perform the most basic as well as complex functions. Such delays would cause monumental delay in car deliveries, with delays stretching to more than a year.

What is the present situation?

The auto industry still reels from the chip scarcity. The months of September and October saw several manufacturers such as Maruti Suzuki, Mahindra and Mahindra, Tata Motors, Hyundai Motor India, and Kia Motors announce a curb on production to adjust losses caused by the chip shortage. This caused delay schedules to extend further, resulting in popular models such as the Mahindra Thar and the Hyundai Creta boasting waiting periods from nine months up to a year!

Consumers exhibited strong demand intent with record bookings for new car launches such as the Volkswagen Taigun, Tata Punch, Nissan Magnite and the Mahindra XUV700. Still, the ongoing shortage proved to be a major spoilsport with delayed supplies. October 2021 sales figures stood at 2,58,774 units, a massive 21% decline over 3,25,965 units in October 2020 - even with record booking behind most new car launches. Leading the charge was the country’s largest carmaker, Maruti Suzuki, registering a 33 per cent decline in dispatches to its dealers.

If you thought luxury cars managed to evade this shortcoming, you’d be mistaken. As high-end cars came equipped with a longer list of luxury features, they required a larger assortment of chips. Evidently, a delay was expected, and luxury carmaker Mercedes Benz was one of the big firms to report waiting periods of around 8-16 weeks for specific models.

 This segregated disruption of supply chain delays seeps deeper into specific variants as well. With every subsequent higher trim level, the technology embedded increases in a car model. And that increases the number of semiconductor chips installed during production. Volkswagen recently announced a two month waiting period for its latest launch - the Taigun compact SUV. However, one could have it reduced to a couple of weeks depending on the variant chosen. In the international market, Porsche told its U.S. dealers to not take orders for its 18-way adjustable high-end seat option on the Macan SUV, a popular pick, as the necessary chips weren’t unavailable.

Till when will the crisis last?

We don’t have a fixed date or even a deadline for a possible end in sight. Experts such as the chief executives of Intel and IBM predict the deadline to stretch into late 2022 or even early 2023 with losses expected to hover around the $60 billion mark. Retrospection into this crisis exposes the vulnerabilities in the global supply chain and exhibits how these issues stem from sources much deeper than it appears at first.

To explain the chip production scenario in brief, the chip developers like AMD, Nvidia, Microsoft design the product in-house while outsourcing the manufacturing aspect to dedicated chip manufacturers like TSMC in Taiwan. While this allows the chip companies to draw out a balance sheet in green, it restricts the supply chain to a handful of producers that reign over the semiconductor supply for the world. And at times of adversities like the pandemic, these outsourced facilities have no option but to reroute the chip supply as per the customer order book instead of catering to or addressing the prevailing demand.

The forthcoming 5G tele- communications network and advanced digitisation will ensure the demands keep mounting. Hence, countries need to stabilise the supply chain, which means regionalising the chip manufacturing process instead of patronising the current globalisation scheme being followed. Setting up semiconductor chip manufacturing facilities within the domestic geography is the need of the hour. Companies can choose to operate these at full capacity only during emergencies, ensuring uninterrupted supply regardless of global calamities.

 When it comes to ideation, India was way ahead of other countries with plans of setting up a semiconductor facility under the banner SCL (or Semiconductor Complex Limited) in 1984. Sadly, the dream was cut short thanks to shortcomings in finance, skilled personnel and necessary technology procurement back in the day. Add the devastating fire outbreak in 1989 to the mix, and the dream of India having its own silicon valley literally went up in flames. Rebuilding the facility hurt the Indian economy vastly, and the succeeding years witnessed SCL’s ledger exhibit nothing but the dreaded red. Unfortunately, the state-owned department was shifted entirely to ISRO, rendering India a cent per cent importer of semiconductor chips to date. Since 2013, India has spent $169 billion on oil imports, $54 billion on gold imports and $31.5 billion on electronic imports. In this regard, following the footsteps of our neighbour China would do us no harm as it recently declared its plans of earmarking close to a trillion US dollars for semiconductor chip production by 2025 with an aim to use 70 percent output in-house.

As for a solution for the current delivery delays with cars - stay patient. Facilities worldwide are running at total capacity to ensure the supply retakes its lead over the demand in automobiles. However, erecting chip facilities within the geographical territories should ensure such issues remain unlikely to crop up in the future. So you might face a delay in getting delivery of your current car, but placing an order for your next vehicle and having it delivered should take next to no time. Fingers crossed, we take a quantum leap of faith.