Global Semiconductor Chip Shortage—A Blessing In Disguise For India
The pandemic-induced lockdown has thrown up another challenge that came to the notice of the world recently-Semiconductor chip shortage. The world is finding it difficult to deal with it.
The problem began last year itself. The lockdown forced everyone to move indoors. People were buying more devices to work from home and to keep themselves entertained during the pandemic lockdown. As a result, the demand for gadgets shot up.
All modern machines use semiconductors. Anything that computes or processes information has a chip, and the world today does not have enough of those chips.
Semicondutor chips are used in everything these days—from small gadgets like smartphones, computers, tablets and smartwatches to complex machines like cars and medical devices.
Almost everything runs on chips which is one of the reasons why there is a scarcity. As a result, manufacturers began hoarding these Semiconductor chips which resulted in the scarcity. The global shortage of chips has adversely affected the global economy.
Many industries are suffering. For some industries, the shortage is a manageable problem. For the auto industry, this shortage is a crisis of epic proportions. Massive chip shortage has led to an enormous backlog in the auto sector.
Buyers are being forced to wait for months. Auto sales in India are falling and losses have been piling up for the automobile industry. The auto industry is the worst hit. In the absence of these chips, it is difficult to provide customers with a new car any time soon.
Over 700,000 car buyers in India are waiting for delivery of their booked car. Maruti has a backlog of 250,000. Other major auto brands like Tata, Mahindra and Hyundai all have a backlog of 100,000 each which is mounting by the day. Even luxury brands like Mercedes have a backlog of more than 2500.
Carmakers around the world are already counting their losses. This year the auto industry is set to lose more than $200 billion in revenue because of this unintended scarcity. It is impacting the economies of many countries. This shortage is expected to last through 2022.
They cannot roll out new cars even if they want to. This year car makers will produce 7 million less cars, and this cut in production is solely due to shortage of chips.
This has far-reaching consequences that goes well beyond this industry as there are many medium and small-scale industries dependent directly on the auto industry. They will be impacted severely by this.
The auto industry accounts for 3% of global economic output. This might look like a small percentage, but the economies of several countries depend on the auto sector.
Japan is one such country which is severely impacted by this slowdown in car manufacturing. Japan is home to auto makers like Toyota and Nissan. Because of this shortage, Japanese carmakers are not performing to their full potential.
As a result, exports from Japan have dropped by a whopping 46%, which has the potential to push the country into recession. Central Europe is also deeply impacted by this with a 20% drop in car output by August this year.
The auto sector in Czech accounts for 9% of its GDP. In Slovakia too, carmakers contribute 13% to the GDP and 46% to exports. All of these countries are facing a downturn in their economy because of chip shortage.
The picture is no different in India. The auto sector in India accounts for 6% of India’s GDP. The sector as a whole generates more than 30 million jobs. It becomes imperative that this sector is revived.
It is possible only if the chip shortage is addressed. There is no solution in sight as of now, and the shortage will continue till next year. Carmakers may have to redesign their cars to cut back on the usage of chips unless someone else starts supplying the chips. This is a great opportunity for India to get in and make a difference.
The solution is to diversify supplies and making more chips. India has come up with a $10 billion strategy to boost the global chip market.
A financial package of $10 billion has been announced by the government inviting leading chip makers from all over the world to come and set up their manufacturing units in India.
The government proposal is quite mouth-watering. If they set up their manufacturing units in India, the government will pay up to 50% of the project cost. There is a separate plan to incentivize local firms. About 100 Indian companies working on chip design could benefit from it.
Responding to this initiative, Taiwan’s Foxconn and a consortium of companies from Singapore have shown interest in setting up chip manufacturing units in India along with Israel’s Tower Semiconductor. Incentivizing chip manufacturers is a very forward-looking step. India is investing in a sector that is ripe for growth in the future.
With Internet of Things, Artificial Intelligence and Machine Learned deemed to be the technology of the future, which heavily depend on chips, it is prudent to make investment in this sector now.
This will be beneficial to India both economically and politically. It will help India rise up in the manufacturing value chain as chip manufacturing is considered to be a high-tech sector. If India can pull this off, it will be a game-changer.
India stands to win big from this initiative. On the one hand it will help ease the chip shortage, and on the other hand it will help to break the monopoly of China on chip manufacturing. China has maximum share on key aspects of chip business.
According to Boston Consulting Group, 35% of world’s chips are either manufactured or assembled in China. Geopolitically, India will help create an alternative supply chain and reduce world’s dependence on China.
Also, by filling the gap, India will help the world deal with chip shortage just like it did with vaccine production. A win-win solution for India as well as the world.
edited and proofread by nikita sharma
