Auto firms stare at supply outages amid global shortage of semiconductors

This comes at a time when demand in world's fifth largest auto market is in the initial stage of recovery after the Coronavirus pandemic-induced lockdown earlier this year

A global shortage of semiconductors (micro processors), a critical component used in the manufacturing of electronic control unit (ECUs), is set to disrupt production at auto firms in India. This comes at a time when demand in world’s fifth largest auto market is in the initial stage of recovery after the Coronavirus (Covid-19) pandemic induced lockdown earlier this year.

Following rapid recovery in demand for discretionary items such as electronics and automobiles, demand for semi-conductors has outstripped supply, leading to a shortage. As a result, while some automakers in India are seeing an increase in lead time for supplies, others have warned of potential disruption.

Mahindra and Mahindra, for instance, sees volumes at its automotive sector contracting owing to the shortage facing Bosch. “The operations of the company in the automotive sector will be affected by the global supply shortage of micro-processors (semiconductors) used in ECUs which are supplied by Bosch,” Mahindra said in a statement on Wednesday.

This, it added, is estimated to result in reduction in production/sales volume in the last quarter of FY21. M&M is engaging closely with Bosch and assessing likely production loss and steps to be taken to minimize the impact of the same, it said.

Two-wheeler firms have also started seeing some impact. Rakesh Sharma, executive director at Bajaj Auto, said though 95 per cent of its production is unaffected, since October the company “is experiencing longer lead times.” For some high end models the uncertainty in the supply environment has gone up.

“Hopefully the pent up demand will exhaust itself and normalcy will be restored in three to four months but till then a strong management effort is underway to minimise disruption,” said Sharma. Bajaj Auto does not have any direct imports of electronic raw materials. It’s imported by company’s tier one suppliers.

In India, Bosch and Continental are the largest suppliers of ECUs to automakers. An ECU is an embedded system that controls electrical sub-systems in a vehicle.

Varroc Engineering and Minda Industries are some of the other tier one suppliers that import semiconductors for the various electric and electrical parts they make locally for automakers.  They import the semiconductors from several countries including China, Malaysia, South Korea, Taiwan, Philippines, Belgium, Germany to name a few.

Arjun Jain, Business head, electrical and electronics at Aurangabad Varroc Engineering says the industry has been facing a shortage of semiconductors since the beginning of this calendar year as several of the key countries where it is imported from has seen lockdowns.   “It’s just that the shortage has increased in the recent past owing to a sharp recovery in demand,” said Jain adding that Varroc has been working pro-actively with its suppliers to ensure production is not delayed.

Puneet Gupta, associate director at IHS Markit, said automakers with a diesel led portfolio are likely to experience a greater impact. “Owing to a shorter development cycle for transition from BSIV to BSVI, they were dependent on indirect imports (through suppliers) from China, Korea and other countries of the ECUs in the BSVI diesel engines,” he said.

Apart from Mahindra, Tata Motors is another firm that has a diesel led portfolio. Most of the other carmakers steered away from diesel technology for mass segment ahead of the transition to BSVI now.

“There continues to remain some Covid related challenges in the supply chain including embedded electronics across the auto industry globally. In this tight supply situation, we see an impact in some applications in our CV business. Going forward, we are actively working with our supply chain partners to mitigate further impact and support market demand,” the company spokesperson said in a statement.

Tata Motors and M&M’s statements followed the notification to the exchanges by the local arm of the German component maker. The demand in the consumer electronics industry has seen steep escalations driven by safety and hygiene sentiments as well as the rise of 5G connectivity, Bosch said in a statement on Tuesday.

As a result, “Imports of Bosch has been impacted with severe supply shortage for imported micro-processors (semiconductors), leading to reduced ability to deliver to the automotive market demand in India.”

A spokesperson at Continental, another key supplier of ECUs to auto firms, said, “This spike in demand has resulted in a supply shortage in the industry for semi-conductors, given the usual lead time (6 to 9 months) the industry needs to meet the requirements,” the spokesperson said in a statement cautioning that the “potential delivery bottlenecks may last into 2021.”

Semiconductor manufacturers have already responded to the unexpected demand with capacity expansions, he added.

Nirmal K Minda, chairman of Minda Industries that makes controls, switches, lights among host of other parts, conceded “The lead time” has increased but his company is managing it with the help of its collaborators. “The electronic content per car has been going up year on year,” said Minda, adding that it be it switches, controls, brakes lights, or other things, it’s intrinsic to a car. “We hope the supplies catch up with demand sooner than later,” he said.