How India can overcome the scarcity of IC chips and drive the growth of electric mobility - Part 1

 Impact of shortage of semiconductor chips on the Automotive industry

A modern high-end vehicle uses a hundred million lines of code, and this number is expected to double in the near future [1]. The latest automotive products extensively use software, electronics, and connected devices to offer smart features to their customers and this trend translates to using more than three thousand chips per vehicle. Centralized electrical, electronic architectures and software platforms drive innovation and product differentiation. All these trends cause a significant increase in semiconductor content, but the vehicles account for only a tiny share of semiconductor chip global demand, approximately 10%. The electronics content of the connected, autonomous and electric vehicle is expected to more than double by 2030 from where it is today, according to McKinsey (USD 469 billion, at a CAGR of 7%). [2] 50 – 60% of the increase is driven by the electrification of the powertrain. Electronic components for autonomous driving and digital architecture contribute to the other 40%.

The acute shortage of semiconductor chips has impacted the automotive industry globally. The estimate of revenue loss because of it in 2021 went up from an earlier $61 billion to a more recent $110 billion as it is expected to impact the production of 3.9 million vehicles globally [3]. Original equipment manufacturers in the automotive sector and others are strategizing approaches to tackle this situation. The chip crunch and how the Indian automotive ecosystem can handle it was the topic for the panel discussions in SAE India’s “Auto Electronics 2021” virtual conference held recently on April 30th [4]. In this paper, we analyze what led to this shortage of semiconductor chips and propose a few ideas that could help the automotive industry to manage the crisis.

What led to the scarcity of IC chips?

Let us first understand the factors that drive the demand from automotive industry Autonomous and Connected Vehicles need more high-performance processors for drive assist and smart connected features

Electrification of Powertrain has led to a rise in demand for power semiconductors

The first two factors arise from new technology adoption and hence cannot be avoided. There are also certain practices prevalent in the automotive industry like Just-in-Time (used to minimize inventory) that are not useful during a supply crisis.

We need to match the rising demand from auto OEMs with the corresponding supply of semiconductor chips. Now let us understand what factors lead to the scarcity of semiconductor chips [5]:

Sanctions and Trade Restrictions seem to encourage countries to build self-sufficiency and resiliency.

Demand from other industries like consumer electronics (high volume chips) and clean energy (power electronics chips) make semiconductor manufacturers to shift their focus from auto industry.

Disruptions in global supply chains due to prolonged lockdowns (COVID-19), natural calamities (Fukushima earthquake, Taiwan drought), snowstorms and power outages (Texas) etc.

Long manufacturing cycles and capacity lead times adopted by the semiconductor industry - when the auto industry demand again picks up, there is a finite lag time for the semiconductor manufacturers to start serving their needs.

Our PESTEL (Political, Economical, Social, Technological, Environmental and Legal) analysis summarizes how the chip shortage has the interplay of many factors behind it .

The shortage did not happen overnight. It started with the sanction imposed by the U.S.A. on China for semiconductor trade (during President Trump’s era). The sanction ironically seems to have benefited China in its journey for self-reliance in the semiconductor sector. 80% of the market in some chipmaking processes like etching, ion implantation, electrochemical deposition, wafer inspection and design software are with U.S. companies, according to Nikkei Asia [6]. Several Chinese companies started coming up to make equipment in the above chipmaking processes. China did a detailed audit of its supply chain for semiconductor chip right up to the nuts and bolts to know the origins at an intricate level. Subsidies from governments and investments from the private sector has helped in this journey. India has launched a self-sufficiency initiative Atma Nirbhar to build indigenous capability in strategic technology areas.

The bullwhip effect

The lockdown due to the COVID-19 pandemic in early 2020 made chip makers shift their focus to other profitable sectors like consumer electronics, which witnessed a huge demand, with most professionals working and students studying, from home. The high volume of chips used in personal devices make it profitable and attractive for chip makers. The current demand for chips from auto industry is relatively low volume but is expected to significantly increase when the auto industry shifts to electric, autonomous and connected vehicles. When the auto industry quickly bounced back during the latter part of the year, the chip makers were not ready to resume supply. Chip making is a long and complex process, with a few months required for a change from one product line to another. Unexpected incidents like a fire accident in Renesas factory in Japan, the drought in Taiwan and the Texas snowstorm caused further damage in 2021. Taiwan Semiconductor Manufacturing Company (TSMC), the largest chip maker accounted for more than half the revenue from wafer-fabrication factories or fabs in 2020. The shortage of clean water in Taiwan impacted its operations, making TSMC recycle water.

There was a bullwhip effect in the semiconductor supply chain. The bullwhip effect is a phenomenon noticed in supply chains. There is amplification of demand variability as we move up the supply chain, from the actual point of demand or the consumers to the manufacturers. The chip industry faced a similar situation in 2020 (Figure 3). Electronic device makers got excited looking at the demand for work-from-home during the pandemic. They rushed to place orders with chip designers and sellers like Nvidia and Huawei. They in turn added a factor of safety and placed larger orders on chip makers like Intel, Samsung and TSMC. Finally, there was a huge backlog of orders and other industries suffered. In a recent World Economic Forum (WEF) report [7] on how to avoid such a situation in future, WEF recommends that panic buying should be curbed, hoarding should be avoided and suppliers should implement limits on shipments, with efforts for accurate estimates of their buyers' actual needs. Some countries are planning for self-sufficiency to avoid dependency on a few sources.

authored by S Ramachandran, Infosys Knowledge Institute, R K Amit, Department of Management Studies, IIT Madras and Shankar Venugopal, Mahindra & Mahindra,