Chip Shortage to Limit Passenger Vehicle OEMs’ Growth: India Ratings

India Ratings and Research (Ind-Ra) has revised its growth estimates for the auto passenger vehicle (PV) segment to 15%-18% yoy during FY22 from 18%-22%, while further downside risk remains.

"Any normalisation in production remains contingent on a softening of demand from various end-consumers of chips and an increase in chip production globally. While certain Indian PV manufacturers have indicated an improvement in production during October 2021 (in relation to August and September), the continuing surge in chip demand globally and time lag to set up new capacities could keep the supply limited. Normalisation can only be envisaged to happen by end-2H22," the rating agency has said.

Profitability Considerations Across Value Chain

The sharp increase in demand for chips and the shorter tenor nature of contracts with the auto sector have allowed chip manufacturers to cater to the technology sector. Sales to the latter provide not only higher realisations but also greater visibility through longer tenor contracts.

Chip Shortages Could Extend to 2022

Chip shortage reflects the sharp increase in demand on account of the computers and wireless usage with increasing use of technology driven segments (such as electronic devices). While auto manufacturers reduced offtake in 2020, demand from technology segments exhibited a spurt and has continued in 2021. Auto manufacturers, who contribute 9% to the total demand for chips, have seen shortages aggravating quarter on quarter during 2021, with global production loss estimated at 10 million vehicles (Source: IHS Market/Fitch Ratings Ltd.) during the course of the year. The view of the speakers was that the situation remains highly uncertain. Given the time lag and the challenges of expanding chip capacity, the shortages could worsen and the situation may not normalise before 2H22. In fact, we may experience an oversupply post planned chip manufacturing capacities come onstream in 2023 and 2024 coupled with the demand normalisation in the personal computer/laptop segment.