9 min read.Updated: 30 Nov 2021, 12:38 AM ISTJharna Mazumdar
A global chip drought has played spoilsport for an industry looking to capitalize on festival demand
Auto makers are tweaking strategy and are diverting chips to high-demand segments such as utility vehicles. Some companies are doing away with features to optimize chip usage
Mahesh Mathur, a Mumbai-based businessman, wanted to buy a Hyundai Alcazar, an SUV, for his family of six. When he heard of the wait time, it left him exasperated—six months. The auto dealer he went to offered him a better option. Why not book a Hyundai Verna instead? That could be delivered faster. Well, in three months.
Mathur agreed to the deal. He picked a ‘starry night’ coloured petrol variant. And then mentally prepared for the long wait.
“I just hope the delivery is not pushed beyond the promised date," he said.
Then, there is Romita Chatterjee who works with an Indian real estate company in Delhi. She booked a Kia Sonet in July this year. The car was delivered in November.
“The dealer kept pushing the delivery date every week. At some point, they also stopped taking my calls," she said. “I got so frustrated I was contemplating withdrawing the booking."
Like in Mathur’s case, the dealer did provide Chatterjee with an option. “They tried to up-sell a different model, which would have cost `2 lakh more. I decided to wait it out," she said.
Chatterjee’s four-month wait appears rather reasonable compared to the plight of other customers, some of who have to wait far longer. If you want to buy Maruti Ertiga’s CNG variant, for example, the waiting period is similar to that of delivering a baby. Yes, nine months! Compare this to the pre-pandemic days and you get the complete picture. One could book and get a new car delivered in eight to 12 weeks.
So, what’s going on? In short, there is a global semiconductor shortage and car makers don’t have enough inventory. In fact, most car makers didn’t anticipate the sort of upturn in demand during the pandemic months. Preference for personal mobility shot up as fear of public transport set in. Besides, consumers love all the bells and whistles premium cars come with. More the electronic features, the higher is the semiconductor quotient. Chips facilitate a range of features such as navigation, infotainment, and traction control among others.
Vinnie Mehta, director general at the Automotive Component Manufacturers Association (ACMA) said an entry-level car in India requires around 10-15 chips, a mid-sized car around 20-25 chips and a high-end one more than 40-50 chips, depending on the level of automation.
India imports electronic and semiconductor components, from countries like China, Japan, Malaysia, Taiwan, and South Korea. The semiconductor industry has its own cycle and chipmakers haven’t been able to ramp up production fast enough to keep pace with demand since the chip industry has long lead times of 12-18 months to get any greenfield facility going, a Crisil research report recently pointed out. The situation deteriorated after Malaysia, a key sourcing hub in the global semiconductor supply chain, reimposed lockdowns early this year to battle the virus—many factories had to shut down twice since June because of covid-19 outbreaks. Chip hoarding by Chinese companies, natural disasters affecting major chip factories, and logjams at ports have further affected supplies, the Crisil report stated. The chip drought is now expected to continue well into the first quarter of the next fiscal.
While for customers, like Mathur and Chatterjee, it has been a rather annoying time, for carmakers it was a clear case of an opportunity lost. The industry couldn’t capitalize on the festival demand.
Data from the Society of Indian Automobile Manufacturers (SIAM) shows that passenger vehicle sales in October 2021 were down by over 27% compared to the year-ago month. “Manufacturers were banking on the festive season to recover from the severe drop in sales they have faced in the early part of financial year 2021-22. However, shortage of semiconductors and steep hike in raw material cost have been a major spoilsport for the industry," Rajesh Menon, director general of SIAM had noted.
“It is like covid. People are frustrated but can’t do anything about it. We are aware of customer discontent but what could be done?" RC Bhargava, chairman of Maruti Suzuki India, asked. “Our customers too have learned to live with it. We had cut production by 60% in September and more than 40% in October. However, things have improved in November and our production cut has been reduced to around 12-15%. Customers are now aware of the situation and are mentally prepared to wait," he added.
Not everyone. They fall back on Plan B.
The pre-owned choice
Nikita Ghag and Kalpesh Dubley, newly married and in their 30s, were planning on buying a new car. They needed a car for shopping, and to visit relatives. “These days Ola and Uber are expensive. Also, there are constant cancellations. With the ongoing pandemic, we are still not sure of using public transport since they are usually overcrowded," Ghag said.
The couple visited several showrooms in Mumbai where they live but the long waiting periods didn’t suit their immediate needs. Instead, they opted for a pre-owned Hyundai i20. Their next new purchase would be an electric vehicle in 2022—of course, if the EV ecosystem matures, Ghag added.
Similarly, many others are delaying their plans for a new car and choosing a pre-owned vehicle for the moment. Ganesh Natrajan, a sales executive with a multinational in Mumbai, couldn’t wait for a new car since offices have reopened. He bought a pre-owned Wagon R, Maruti Suzuki’s hatchback.
“I am now vaccinated with both the doses. I have started going to the office regularly. The need to get a car was therefore urgent," he said. Before the pandemic struck, he frequently used public transport, and the cab aggregators to travel. “I no longer wish to use public transport as the pandemic is not yet over," Natrajan said.
The loss for car makers translated into a gain for pre-owned car dealers. They are reporting quantum jumps in demand. One Hyundai dealer, who didn’t want to be identified, said that their orders for pre-owned cars have increased by more than 50% compared to a year ago. In parallel, customer complaints pertaining to new car deliveries have surged nearly 10 times.
Meanwhile, this sort of a demand appears to be shooting up the valuations for pre-owned car platforms. Spinny, a Gurugram-based startup that operates a platform to facilitate the purchase and sale of used cars, raised more than $280 million in its Series E venture round in November. The round, which was co-led by Tiger Global and Abu Dhabi Growth Fund, valued the company at over $1.75 billion. This is the third funding round raised by Spinny this year—its valuation rocketed from about $350 million in April. Earlier, in September, Cars24 Services, an online marketplace for used cars and two-wheelers, raised $450 million in a new funding round led by SoftBank Vision Fund 2, DST Global and Falcon Edge. The Series F round nearly doubled Cars24’s valuation to $1.84 billion from $1 billion last November.
Transparency & more
What are dealers and auto makers doing to address customer dissatisfaction with long wait times for new cars? Transparency appears to be the key word doing the rounds.
Instead of hiding information while taking the bookings, many dealers said it is wiser to educate customers on the delays. That may make them less agitated, going forward. Many auto showrooms therefore have the waiting periods mentioned on a board near the entrance—in many cases, that’s the first thing to catch the eye.
Car makers, for now, appear to be working on different strategies to mitigate the supply-side bottlenecks. During its earnings conference call on 1 November, Shailesh Chandra, president of Passenger Vehicles and Electric Vehicle business at Tata Motors Ltd, said the semiconductor supply situation continues to remain precarious in the third quarter, even though it may be better than the second quarter.
“We are taking various actions to minimize any adverse impact. Also, over the last 18 months, we have been taking various actions to de-bottleneck capacities, especially for the high demand models and various aggregates like engines. This is more or less in place now to support the plan that we have in this financial year in terms of the monthly volumes. Also, we have identified some critical components where we are trying to build to the best possible extent strategic inventory," he said.
According to Vinnie Mehta of ACMA, Indian companies are managing the chip shortage situation better compared to other countries because some automation technologies are yet to be introduced in the country. They include autonomous emergency braking system and lane departure warning system among others. While two airbags are mandated for passenger vehicles in India, globally, cars have six air bags. Similarly, when it comes to advanced driver-assistance systems, India is probably at level 1—in many advanced countries, vehicles are at level 3 or 4. All this adds up to significantly high electronics content in international vehicles, including semiconductors.
Mehta added that companies have tweaked strategy and are diverting chips to high-demand segments such as utility vehicles and are prioritizing production of premium passenger vehicles. Many companies are doing away with features to optimize chip usage, and are trying to bring down the number of chips required in a component. These measures, along with a focus on smart inventory planning, may help the industry tide over the crisis to a certain extent.
“The industry is working relentlessly to address the issue which we believe might continue for the next nine to 12 months, although post opening up of Malaysia, the worst may be behind us," Veejay Nakra, chief executive officer, Automotive Division, Mahindra & Mahindra said. “At Mahindra, we are finding credible and innovative methods like sourcing from the open market to address the challenge on priority," he added.
In a statement, Hyundai Motor India stated that the company is coordinating with Hyundai Motor Company, Korea, to help run operations in India smoothly. A sustainable and consistent solution to such issues, the company added, is to have a strong vendor base in India that can ensure the supply of critical components for the auto sector.
One realizes that the semiconductor shortage is just the latest blow in a series of setbacks to the auto industry. Even prior to the pandemic, India’s economy wasn’t exactly galloping and car sales fell far short of what many experts expected. Just when the sector seemed to be on the verge of a recovery, came the pandemic. Lingering supply-side issues now have knocked off festival demand. To add to the woes, input costs have risen by around 15% from a year-ago, causing a dent in profitability.
Industry bodies such as SIAM as well as auto companies have been demanding a reduction in Goods and Services Tax (GST) for the sector, to reduce the costs of vehicle ownership. Cars attract 28% GST and customers pay a cess, which varies depending on the engine capacity.
However, the government has thus far dismissed any such demand—the Centre is under pressure to stabilize its tax revenues, which is facing a shortfall after the recent fuel duty cuts. In fact, a top tax committee is set to weigh an increase in India’s GST slabs across various products to raise an extra ₹3 trillion revenue annually, Mint recently reported. The tax hike will create space for spending on welfare schemes.
The auto industry, meanwhile, may have to brace for more supply-side nightmares. If the Omicron coronavirus variant disrupts global recovery, longer wait times for customers will possibly be the next normal.
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