How the global crisps shortage is holding back India’s party spirit
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The holiday season, currently underway in India, is traditionally a time for Indians to make major purchases, like a new TV, smartphone, or even a car.
But this year, despite strong consumer demand following an easing of Covid-19 restrictions, electronics and auto makers say their zest for life has been dampened by the global semiconductor shortage.
This slows down production and results in fewer attractive seasonal discounts available to consumers.
âThe situation is surely not good,â says Ashutosh Verma, founder of electric scooter maker Exalta India, adding that their most popular model is affected. “The chassis part of the vehicle is ready but we are unable to deliver the vehicle due to a delay in the chips.”
The shortage is frustrating because it affects production during the holiday season âjust when consumers are ready and willing to spend,â Verma says.
Semiconductors, also known as chips, are essential components of electronic products such as smartphones, televisions, laptops, and vehicles.
But the global semiconductor crisis poses a challenge for businesses, caused in large part by an increase in demand for electronics during the Covid-19 pandemic.
It comes as India’s consumer-driven economy is recovering after being hit hard by the impact of the pandemic, contracting 7.3% in the fiscal year up to the end of March. India’s economy is expected to grow 9.5% this year, according to the International Monetary Fund.
With the five-day Diwali festival starting on Tuesday, now is the perfect time for Indians to loosen their purse strings for goods, including cars.
However, the chip shortage has hit automakers particularly hard. Last year’s lockdown restrictions affected car production and led to a drop in semiconductor orders, prompting suppliers to divert components to the electronics industry due to a surge in consumer demand largely confined to their homes for months.
“Poor inventory planning by equipment makers, Chinese companies’ hoarding of chips and natural disasters affecting major chip factories have further compounded the problem,” said Anuj Sethi, senior manager of Crisil Ratings, who majority owned by S&P Global. “The congestion in the ports also affected the shipment of chips this fiscal year.”
Passenger vehicle sales in India will be around 400-600 basis points lower in the current fiscal year, April 2021 to March 2022, compared to the corresponding previous year due to the scarcity of semiconductors, says Crisil.
Demand is high, but there are long waiting lists for several car models, which in some cases can be as long as nine months.
âSince the start of the pandemic, the preference for personal mobility has increased, resulting in more than expected demand for passenger vehicles,â Sethi said. “Consumers also preferred vehicles with more electronic functionality or a higher semiconductor quotient.”
Subsequent production cuts “will also affect the continuation of the holiday season, when sales are generally higher.”
The scale of the problem is reflected in India’s largest automaker, Maruti Suzuki, which last week tempered its sales and profit expectations for the current fiscal year.
“We weren’t expecting to lose so much production in the second quarter because of the chips,” RC Bhargava, president of Maruti Suzuki, said on an earnings call after the company posted a 65.3% drop of its net income for the quarter at the end. September.
âWhat we expected in terms of volumes and profitability has changed considerably,â he added. âThe shortage of semiconductors and electronic components and the increase in the price of components and commodities are on an unprecedented scale. “
In response, the company was forced to cut production by 60% in September.
Other Indian automakers, including Tata Motors, have warned of the impact of the chip tightening on their businesses.
The effect has also affected hiring trends in the industry, says Indranil Ghosh, vice president and business leader at TeamLease Services, a human resources company.
âThe feeling of hiring is slowly improving but it is not up to the task [it should be],” he says.
If the automotive sector is hit hard by the crisis, electronics are also affected by the shortage.
Smartphone shipments to India fell 2% in the third quarter of this year to 52 million units, according to a report by global research firm Counterpoint.
âThe quarterly numbers would have been even higher without the component shortages that worsened during the quarter,â said Prachir Singh, senior research analyst at Counterpoint.
âConsumer demand has exceeded supply due to strong pent-up demand. With the global component shortage in mind, most brands were struggling to ensure sufficient stock for the holiday season. “
The prices of electronics, including cellphones, laptops and televisions, have also jumped due to the chip shortage and it is becoming increasingly difficult for companies to launch the usual festive discounts without touching their bottom line. , according to the manufacturers.
“After the auto industry, the television industry has been hit the hardest by the global semiconductor shortage,” said Pallavi Singh, vice president of SPPL, India’s largest television maker.
The company managed to avoid “too much of an impact” on its business because it had an inventory backlog, but the situation “will not improve in the near future,” Singh said.
Semiconductor shortages will continue until next year, according to many analysts.
âConsideration should be given to creating an ecosystem capable of sustaining itself in the event of such events in the future,â says Singh.
Like many other electronics manufacturers, SPPL relies heavily on semiconductors from Taiwan, Singh adds.
âIndia has limited semiconductor manufacturing facilities and these are managed by the Indian government and mainly cater for the defense and space agencies of the Indian government,â said Hemant Mallapur, co-founder and executive vice president of engineering at Saankhya Labs, a Bangalore. semiconductor-based start-up that designs chips.
“The main reason for the low number of manufacturing facilities is the huge investment of billions of dollars that is required to set up a factory.”
The Indian government, however, recently unveiled what it describes as “an electronic component and semiconductor manufacturing promotion program,” which includes financial incentives to set up semiconductor factories in India. because it seeks to mitigate supply disruptions.
“This program is expected to boost semiconductor manufacturing in the country,” Mallapur said.
âSemiconductors are the backbone of many industries,â he says. âThe current global semiconductor market is highly centralized, with the majority of production taking place in Taiwan. “
This makes the global supply chain very vulnerable to any disruption, he adds.
“To mitigate these risks, it is important that India begins to manufacture semiconductors locally.”
However, manufacturers are concerned about the impact of a prolonged chip shortage on their sales beyond Diwali.
âWe need to look for ways to reduce our dependence on other countries to meet this challenge,â said Mr. Verma of Exalta India.
Update: October 31, 2021, 5:30 a.m.