Chip shortage may pull down auto volume growth to 11-13%: Report

10:05 AM Oct 27, 2021 | Team Udayavani |

Mumbai: The ongoing chip shortage is likely to moderate passenger vehicle sales growth to 11-13 per cent this fiscal, down from the earlier volume growth forecast of 16-17 per cent, delaying the industry recovery as the waiting period is increasing amid strong demand due to production curbs, says a report.


The semiconductor shortage will lead to a decline of 400-600 basis points in sales from 16-17 per cent seen earlier to 11-13 per cent, according to a Crisil analysis of the top three passenger vehicles companies which command a combined market share of 71 per cent.

Semiconductors or chips are key components of a vehicle as they facilitate a range of features such as navigation, infotainment and traction control and more the premium the use of chips goes up.

For OEMs, the shortage has led to production losses, while for customers, the waiting period for some models has increased from 2-3 months to 6-9 months now, the report said.

Pandemic-induced uncertainties led to sharp swings in orders by auto companies which account for 10-12 per cent of global chip demand, the report noted, adding this led to chip makers diverting their supplies towards other sectors like consumer electronics which saw significant surge in demand, especially during the lockdown months of the pandemic.


The report blamed the shortage to poor inventory planning by OEMs, chip hoarding by Chinese companies, and natural disasters hitting major chip factories apart from the logjams at ports.

Since the pandemic began, preference for personal mobility has increased, leading to more-than-expected demand for cars, it said. Besides, consumers have also been preferring vehicles with more electronics-driven features which employ more semiconductors, the report said. The upshot of the chip shortage is cut in car production, which will have a bearing on the ongoing festive season as well when sales are typically higher, it said. ”Consequently, we foresee tempered overall growth for the automobile industry this fiscal,” the report said, adding the shortage is expected to will linger onto the first quarter of 2022 as capacity addition is not keeping pace with demand. It takes at least 12-18 months to set up a greenfield chip facility.

OEMs on their part coping with the shortage by diverting chips to high demand segments such as utility vehicles (51 per cent of sales in the first half of this fiscal up from 42 per cent on-year, from mid-segment vehicles including sedans), and prioritising the production of premium cars. Some of them are even removing features from certain models, to conserve chip usage, it said. Besides, the impact on operating leverage stemming from production losses, higher metal prices can also dent their operating profit by 100-150 bps to 6.5-7 per cent this fiscal, the report said, adding however, their credit profiles will remain stable driven by still healthy cash flows, strong balance sheets and robust liquidity.


Udayavani is now on Telegram. Click here to join our channel and stay updated with the latest news.