Demand disruption led to semiconductor shortages in auto sector

The unprecedented demand for semiconductors from three major non-auto industries during Covid-19 led to short supply in the automotive segment.

Most of the Indian companies have been facing challenges in procuring ECUs (electronic control units) due to global shortage of semiconductors. Indian auto manufacturers import about ₹30,000 crore worth of electronics and related systems and the drop in such imports in recent months has severely impacted the automotive supply chain.

New vehicles that auto manufacturers launch in the market increasingly use advanced technological gadgets, thereby increasing the demand for semiconductors. In the 1950s less than one per cent of the total cost of manufacturing a car was comprised of electronics. Today that cost goes up to more than 35 per cent of the total cost of a car, which in all certainty is expected to increase to 50 per cent by the year 2030. Of this, the bulk is comprised of semiconductors, says a report of EY India.

Companies such as Ford, Mahindra and Ashok Leyland have raised flags over the short supply and indicated that it could impact the production in the coming months. Car industry is likely to see an impact by way of constraints in manufacture of new vehicles. Auto industry expects the issue to stay till first half of 2021.

Mahindra & Mahindra has already indicated that it would push the new product launches beyond Q1 of next fiscal due to the semiconductor shortage.

EY India report points out that short supply was caused due to unexpected rise in demand from a few non-auto segments.

WFH trend

Due to work-from-home trend during Covid, sectors such as IT, consumer and healthcare saw an increased consumer demand. This increase further translated into higher demand of semiconductors. For quite some time, semiconductor companies continued to fulfil the robust demand that arose with the changed world order owing the pandemic.

Vinay Raghunath, Partner and Automotive Sector Leader, EY India, said, “Today, semiconductors are an essential part of the DNA of new-age gadgets spanning smartphones, laptops and cars. The post-Covid demand growth across sectors has created a sudden splurge in demand for semiconductors which is another supply chain constraint that automotive manufacturers need to prioritise and address.”

While car sales are reviving in the post-lockdown period, the semiconductor industry is finding it difficult to address the increasing demand as it is busy supplying to other industries such as IT, consumer electronics, mobile and medical equipment.

“The current semiconductor shortage will certainly revive with time. However, other similar disruptions may occur again. Automobile manufacturers should make use of rapid what-if scenario modelling capabilities that are available in modern day Intelligent digital planning solutions to assess such risks in advance,” said Yugesh Aglawe, Partner and Supply Chain Leader, EY India.