In the near-term, the industry will scramble to cope by reverting to older systems, reducing features in vehicles, and delaying deliveries. In India, for instance, the delivery backlog currently stands at around 700,000 passenger vehicles and had hit a peak of almost a million during the festive season.
Rationalizing the number of chips per vehicle will be important. While new automakers tend to follow a ‘System on Chip’ (SoC) approach to contain their count of wafers, some luxury models use up to 100 chips per car. With ongoing work to combine multiple SoCs, the industry should see a progressive easing of the crunch.
A longer-term response has also started to emerge. Tesla has a long-term deal for next-generation autonomous vehicle chips with Samsung, which has announced a new chip plant in Texas. More dramatically, both Ford and GM have said they would get into long-term design and manufacturing arrangements. Importantly, national governments have also started treating chip supplies as a strategic imperative.
It is heartening that India’ government has come out with a comprehensive strategic plan for securing long-term supplies. The Centre’s newly announced $10 billion incentive scheme for high-end chip-making should evoke interest among global majors and can go along way in establishing a strong electronics manufacturing base in India. This plan might not help alleviate the near-term shortage, but will help Indian manufacturers secure supplies and compete globally in the long-term.
While capacity is indeed being added, the more important factor is demand. If semiconductor demand slows down, the situation can ease. However, a demand surge in segments that have secured supplies would leave little residual output for those that have not. This will create risks for component suppliers, as their ability to secure long-term supplies is limited.
This article is written by Neeraj Mohan, Partner & Head - EY Parthenon India. It first appeared in mint on 28 December 2021