Why chip shortages continue to plague the auto industry post-covid

How has chip supply shaped up since 2021?

The covid-19 pandemic led to a global shortage of semiconductor chips as demand for electronic devices surged, which caused supply chain disruptions across sectors. The automotive industry relies heavily on these chips for various functions, and was hit particularly hard. According to JP Morgan Research, “the chip shortage is all but over". Global automotive sales volumes are expected to rise 3% in 2023, compared to a 26% decline in the first 9 months of 2021. In general, supplies are expected to improve as capacities that started getting added in 2022 continue to be enhanced in 2023.

What then is the challenge?

While there is improved overall availability, the nature of the supply chain disruption has changed. Increasing electrification and a preference for high-end passenger vehicles means that shortages of specific chips and electronics will continue for some products. This in turn means many vehicle manufacturers are unable to ramp up volumes of in-demand products. For instance, some Indian automakers are grappling with a dearth of electronic control unit chips for airbags, which is impacting waiting periods. These shortages could remain through 2023 and continue in 2024, JP Morgan said.

Have delivery dates improved for automakers?

There were some signs of easing in the chip shortage in the last few quarters of fiscal year 2023, but availability is uncertain again in Q1 of 2024. As a result, delivery dates for some popular models continue to lag. M&M is facing issues with its popular Scorpio-N, and Toyota has temporarily halted bookings for top trims of its Hycross SUV due to supply issues.

What is the impact on production plans?

Maruti Suzuki, India’s largest carmaker, expects the chip shortage to continue to impact production in FY24. Supplies in the first month of this quarter look worse than in the last quarter of financial year 2023, Maruti Suzuki chairman R.C. Bhargava said. The company lost 170,000 units in production in financial year 2023 due to the semiconductor shortage. Luxury carmakers like Mercedes Benz have even postponed new product launches to ensure they have enough chips to fulfil demand.

What is the outlook for chip availability?

A general improvement in availability can still pan out very differently for companies. Automakers are hopeful that the situation will ease in the coming months, but the visibility of chip availability is still limited. Passenger vehicle makers are factoring a 6-8% volume growth to up to 4.10 million units this fiscal. But each automaker’s growth will depend on chip availability and how they match demand. Firms are prioritizing top-of-the-line variants to maximize profitability.