A global shortage of semiconductors is causing the production of parts and vehicles to be disrupted. Several major carmakers and their suppliers are being impacted by a supply bottleneck caused by diverse factors, including the effect of Covid-19 on demand in the first half of 2020 and manufacturing investment.

The shortage is the product of a perfect storm, as the automotive sector saw more volatility in 2020 than any other industry that purchases semiconductors. At the same time, capacity constraints in semiconductor facilities were caused by high demand from other industries. The subsequent recovery in car sales and factory production was stronger than expected in all areas, owing to pent-up demand during the lockdown.

Semiconductors are the brains behind a growing number of items, including vacuum cleaners, refrigerators, computers, and space shuttles. Hundreds of integrated circuits monitor airbags, power windows, catalytic converters, and dashboard displays in the typical car.

Since automakers use many chips that were produced years ago and are lower-priority products for semiconductor manufacturers, the supply crunch has hit them especially hard. These chips have lower profit margins than the newer, more expensive semiconductors that power 5G smartphones and video games, which are in high demand around the world and dominate many production lines.

The origins of the shortage can be traced back to the early days of the pandemic when auto plants across the world suddenly shut down in response to widespread stay-at-home orders. Between February and April, auto sales dropped by nearly half. As a result, automobile manufacturers and their component suppliers have sharply reduced their semiconductor purchases.

Simultaneously, demand for computers and other gadgets exploded as people sought to make their new work-from-home lives bearable by stocking up on monitors, tablets, and entertainment devices. As a result, chip purchases by those companies increased.


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Major Highlights of the Market: Leading players at risk

In India, Mahindra & Mahindra has announced a shortage impact, and Girish Wagh, President – CVBU, Tata Motors, stated that "the global semiconductor shortage, due to the shift to feed personal electronics, is creating a bottleneck in the smooth functioning of the supply chain" during an Autocar Professional webinar on January 18. Tata Motors' CV operations are also affected." “The loss is expected to be large, with both suppliers and OEMs impacted,” according to LMC. Mahindra & Mahindra has already declared production cuts for the first quarter. The situation is still volatile in terms of the effect – there's a chance of a 12% drop in Q1 and a 10% drop in Q2.”

A plant fire at semiconductor supplier Asahi Kasei Microsystem in October 2020 disrupted chip supply in Japan. Japan is also seeing some chip diversions from the automotive industry into the gaming industry. Due to the shortage, Honda and RNM have already reduced their Q1 plans. Korea should be spared the brunt of the global chip shortage because it is home to two of the world's largest semiconductor manufacturers, Samsung and SK Hynix, both of which are ramping up chip production. Given its global sourcing presence, GM Korea is a downside concern.

Ford, the American automaker, has had to halt production for the time being. The company said in a statement that both of its plants in Chennai and Gujarat are experiencing supply issues and that they expect the shortage to last at least until the first half of 2021.


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