Chip shortage finally bites in India

Festival season in India usually augurs a peak in car sales, but chip shortages are likely to curtail inventory significantly this year.

Ammar Master, Senior Manager, Asia Pacific Vehicle Forecasts

04 October 2021

The familiar Charles Dickens quote, “It was the best of times, it was the worst of times” seems apt to describe the current situation in the Indian auto market. The auspicious festival season, when buyers typically clamour to buy new vehicles, is imminent, but the shortage of semiconductors will leave automakers struggling to fulfil the spike in demand.

In the early stages of 2021, our thinking was that the chip scarcity would be resolved within six months and that any production loss in India would be recovered in the second half of the year. As the deadly second wave of the pandemic hit the country in April, triggering localised lockdowns and plant closures, we believed at the time that the pandemic-induced production disruptions would allow OEMs to eke out their supply of chips just long enough to remain largely unscathed by the shortage.

In reality, however, the situation deteriorated rapidly after Malaysia – a key sourcing hub in the global semiconductor supply chain – reimposed lockdowns in June to control the renewed spread of COVID-19. This has left chips in scant supply, so much so that market leader Suzuki was forced to shut down its Hansalpur, Gujarat plant for three days in August and move some of its production lines from two- to one-shift operations. Worse still, Suzuki expected its cumulative Indian output in September to plunge by 60% from normal levels. Its supply of chips, however, may have improved in October as Suzuki is anticipating a lower hit to output, of 40% versus its normal level. 

With India’s auspicious festival season just around the corner, the supply crunch could not have come at a worse time for automakers and dealers alike. Passenger Vehicle wholesales already dropped from 286,000 units in July to 252,000 units in August, despite strong enquiries and bookings, entirely due to weaker output volumes. Furthermore, advance data for September suggest that sales shrank to fewer than 200,000 units.

“Supply is becoming a bigger problem currently due to [the] shortage of semiconductors, even though there is high demand for passenger vehicles. Every dealer by now starts planning for a bigger offtake in anticipation of a bumper festive [season] but due to supply issues, inventory levels are at lowest levels during this financial year”, said Vinkesh Gulati, president of the Federation of Automobile Dealers Associations (FADA).

FADA further noted that, for the first time, buyers may not be able to purchase the vehicle of their choice, or benefit from lucrative incentives during the festival season because of the ongoing supply-side constraints and limited product availability. The lack of vehicle supply and ensuing long waiting periods could also drive buyers away from the market.

Given the prolonged and worsening state of the semiconductor crisis, we have reduced our 2021 and 2022 Passenger Vehicle Sales forecasts to 2.89 million units (+23% year-on-year) and 3.22 million units (+12% year-on-year), respectively. This contrasts with corresponding forecasts of 3.18 million and 3.37 million units, respectively, at the start of the year.

Gloomier still is the likelihood that these lost sales will not be recovered in later years, due to a sluggish economic recovery and the risk of a third wave of the pandemic. In short, the confluence of the additional disruptions from the pandemic and the chip shortage will now constrain the pace of recovery in the Indian Passenger Vehicle market.