Embed Size (px)
Citation preview
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 1/12
Synopsis
Automakers are digging in to overcome the global shortage of semiconductors, something that will leave alasting impact on the industry. While legacy approaches to supply-chain management can be blamed for the
current mess, the real solution lies in making systemic changes. Can auto companies �x what’s broken?
Home ETPrime Markets News Industry SME Politics Wealth MF Tech Jobs Opinion NRI Panache ET NOW More
Tech Consumer Markets Corporate Governance Telecom + OTT Auto + Aviation Pharma Fintech + BFSI Economy Infra Environment Energy
Business News › Prime › Auto + Aviation › Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain
AUTOMOBILE
Lessons from a USD60 billion hit:an automakers’ guide to rewiring
the chip supply chain
Getty Images
The chips are down, literally. And the reverberationsare a thunderous USD60 billion.
| E-PaperEnglish Edition
Shishir
00:0000:00 01:2001:20
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 2/12
ICYMI, at the centre of this storm is a shortage ofsemiconductors globally that has put automakers inmuck. At present, there are two kinds of automakers.Those who have been a�ected by the chip shortageand those who soon will be. So much so that theshortage is forcing automakers to sell suboptimalproducts.
General Motors in the US is in such a desperatesituation that it is now building pickup trucks withouta fuel-management module, which will result inlowering the fuel economy by a mile a gallon.
Clearly, something’s gotta give, something’s gottachange.
So, who should the automakers blame? Well, no one,but themselves.
Consultancy �rm Bain & Company reckons the messisn’t just a result of temporary factors. There aresystemic issues at play. It says that a lack ofunderstanding about risk exposure, in combinationwith “legacy” automotive approaches to supply-chainmanagement, brought the industry to this point.“Individual players, and the industry as a whole, needto de�ne holistic chip strategies that make them moreresilient against external shocks,” it believes.
This brings up the next question: How is the globalautomobile industry, and India’s automakers, reacting?
The ground situation There are various approaches to manage the shortage.
Stopping production is not a viable option.However, slowing production is one way. Result?Waiting periods for vehicles could rise to betweenthree and six months or beyond, as originalequipment manufacturers (OEMs) space outcomponents on a priority basis.
Spot buying of semiconductor chips in the openmarket. Mind it, this comes at exorbitant prices.
Addition of capacity by chipmakers. But that willtake time.
BY
Shobha MathurKanika Saxena
Nirmal JohnShishir Prasad
10 MINS READ
Mar 19, 2021, 12:01 AM IST
Share This Article
GIFT ARTICLE FONT SIZE SAVE COMMENT
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 3/12
Putting pressure through government-levelnegotiations on Taiwan’s semiconductorbehemoth, TSMC, which supplies 80% of chipsused by the auto industry globally.
A search is on for alternative sources that can meetquality requirements. But this isn’t going to be easy.
Wait for white-goods demand to peak and settle toearlier levels as recovery sets in.
Automakers are projected to lose a mind-numbingUSD60 billion in sales in 2021, according toconsultancy �rm IHS Markit. The real solution lies inmaking systemic changes. Reuters, reporting on Toyotabeing relatively unscathed thus far, writes that theJapanese company’s resilience is explained by itsdecision to stock key electronics components. Toyota’smove stemmed from a lesson learnt during the supplycrisis it faced during the Fukushima nuclearmeltdown. The carmaker had realised that the leadtimes for electronics was too long and vulnerable todisasters — natural or otherwise. That said, Japan’ssecond and third largest automakers, Honda andNissan, both had to cut production.
Barnik Chitran Maitra, managing partner, India, atconsultancy �rm Arthur D. Little, says the SouthKorean manufacturers, who have a large number oflocal suppliers and are likely sitting on good chipinventory, have come out relatively unscathed fromthe shortage.
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 4/12
Naveen Gautam, managing director of Germanelectronics companies Hella India Automotive andHella eMobionics, says they are �ghting on a day-to-day basis but haven’t stopped supplies to anyautomaker. Almost all major automakers are Hella’scustomers. “Locally, Hella has been buying fromtraders and other vendors and looking at everyopportunity of grabbing the material from the market.”
Gautam cites the three important channels of sourcing— direct from chipmakers, through their distributors,and buying from traders. The last group is currentlyreleasing limited quantities at �ve to 20 times higherprices than the normal in the open market. Tradersplug gaps when the normal supply chain is unable toreplenish stocks. Known as spot buying, it involvessmall volumes exchanging hands. CAE, a US-basedtrader of semiconductor-production equipment andcommodities, says in 2020, it recorded a 42% growthon the back of heightened demand.
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 5/12
Rethinking automakers’ relationship with the siliconsupply chain might be the most important change onthe anvil. What does that entail?
Tarun Mehta, chief executive of electric scooter makerAther Energy, says there is a case for automakersreevaluating their lead times for electronics. Mehta,having had trouble setting up supply in the early daysof manufacturing the Ather 450, says changes mayneed to be brought in the just-in-time philosophyautomakers have long adopted as best practice.Holding inventory for far longer is critical.
There may also be a need for more aggression fromautomakers in increasing commonality ofcomponents, and �exibility of manufacturing.
Fi�ing what’s broken On their part, silicon suppliers like In�neonTechnologies are going ahead with augmentingcapacity, increasing their investment to EUR1.6 billion. “This will enable us to pull in the start of productionof our new 300 millimetre facility in Villach, Austria,by around a quarter, to the fourth quarter of our 2021�scal year (originally planned for the end of calendaryear 2021),” says Girish Kamala, director and head of
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 6/12
country sales-automotive, In�neon TechnologiesIndia.
Last year, In�neon ran inventories at above-normallevels to minimise supply disruptions, and the same ishappening now. “We can ful�l con�rmed orders,” addsKamala. For 2021, In�neon had factored in somegrowth in automobile production and plannedaccordingly.
German component maker Continental has set up taskforces to track the situation closely and quickly takenecessary steps to manage the issues arising out of it,according to Prashanth Doreswamy, country head -Continental India and managing director, ContinentalAutomotive Components (India).
“We are in close contact with our customers andsuppliers and communicating openly andtransparently,” says Doreswamy. The auto-componentmaker claims to be communicating daily with itssuppliers down the chain to keep track of productionand shipment schedules and monitoring bottlenecks.
Continental says it is negotiating to increase volumesthrough capacity expansion, investigating alternativesourcing and materials, and is providing additionalinvestments in furthering capacities and supportingits supply chain during the negotiations with sub-suppliers. It is also working with industry associationsto lobby governments.
Needed: structural changes According to David Loftus, president and CEO,Electronic Components Industry Association, onereason for the problem is the structure mandated bythe automakers.
“A vehicle needs many more types of chips than asmartphone, but the production of auto modelsusually only runs into tens of thousands, much ofwhich should be serviced more e�iciently by channelpartners. In comparison, production lot sizes forsmartphones run into millions. So, it’s more e�icientfor them to buy directly from semiconductormanufacturers,” he points out.
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 7/12
"�e have to wait for capacityenhancement by chipmakers sothat we get semiconductors tothe e�tent the market requires.
He says electronics-distribution �rms like Avnet orArrow could have batched demand from variousautomakers and created the volume thatsemiconductor producers need. “But a lot ofautomotive OEMs and tier-1 suppliers like Bosch haveforced semiconductor manufacturers to deal withthem directly and that has created what amounts toan ‘impedance mismatch’ in the component supplychain ‘circuitry’, if you will,” he explains.
Production in the auto industry moves on demandforecasting. Swings beyond 10% come with a huge cost.Automotive companies have demand-forecastingsystems, which are integrated with dealerships andsupply chain work cycles. This is to make sure theyfunction e�iciently and in sync. Unfortunately, most ofthese didn’t quite kick in well enough last May, aslockdown eased, and sales slid 80%.
To better prepare for such systemic shocks,automakers have concluded that they need morecomplex, nuanced forecasting methodologies that gobeyond just building a couple of possible scenarios.
A recent report from consultancy �rm EY on‘Semiconductor supplies hitting vehicle sales’ suggestsways of mitigating challenges in the supply chain withe�ective technology-based planning. The report talksof a suite of 14 AI-enabled integrated planningsolutions to help build a lean and responsive supplychain.
“Other similar disruptions may occur again,” cautionsYugesh Aglawe, partner and supply-chain leader, EYIndia. “Automobile manufacturers should make use ofrapid what-if scenario-modelling capabilities that areavailable in modern-day intelligent digital-planningsolutions to assess such risks in advance.”
Thehurdles forIndian
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 8/12
So, waiting periods willincrease."— Naveen Soni, senior vice-president, sales andservice, Toyota Kirloskar Motor
automakers Currently, more than 75% of all electronics used inIndian cars is imported. While there are limited stocksof electronic control units and controllers with OEMs,the priority is to use them prudently, as the numbersare not adequate to meet the existing demand. Bestoption is to accept the vehicle bookings and space outdeliveries as and when the electronic components areavailable.
It is the Indian vehicle manufacturers that seem tohave borne the brunt of the chip shortage, withMahindra & Mahindra (M&M), Tata Motors, AshokLeyland, Volvo Eicher, Hero MotoCorp, and Bajaj Auto,believed to be hit harder.
A Tata Motors spokesperson says the company istaking “appropriate measures” and feels the challengesare likely to continue through FY22. Pawan Goenka,managing director and CEO of M&M, had said duringthe Q3 FY21 results that the company was managingthe problem on a day-to-day basis. “The situation hasto be watched and managed. Given the global nature ofthe situation, it may spill into Q2 of the calendar year.”
Interestingly, the top two passenger-vehiclemanufacturers, Maruti Suzuki and Hyundai MotorIndia, are largely unscarred so far. Hyundai has controlover its value chain with a South Korean chipmakerwithin its portfolio. Having a signi�cant stake in thesemanufacturers, it can secure chips for its cars.
Wherever vehicle manufacturers have control overtheir value chain because of their investments orholdings, they will ensure their demands are met. Tataand M&M are dependent on tier-1 suppliers who areimporting and are more impacted, feels Rajeev Singh,partner, Deloitte India.
Shashank Srivastava, executive director, sales and
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/pr… 9/12
marketing, Maruti Suzuki, says that the company isnot facing any shortage, but it is “monitoring thesituation very closely”. Sources say Maruti hasbene�tted from placing large orders. Suppliers tend tohonour large commitments on a priority basis whenstocks are limited, delaying or postponing smallerorders till supply normalises.
While an automaker like Maruti maintains that it hasreserves to tide over the irritants in the electronicssupply chain for now, it could be in dire straits if thepain is prolonged.
Napino Auto & Electronics, a key electronics supplierto Hero MotoCorp, has been managing long-termorders with suppliers and says it has allocations ofsemiconductors at the required run rate. Hemant Patil,head, procurement at Napino, claims it is ahead in thequeue for supplies, thanks to long-term contracts.
For Toyota Kirloskar Motor (TKM), its average waitingperiod for models could double to two months if themarket demand continues to rise and the shortagecontinues. Naveen Soni, senior vice-president, salesand service, TKM, says, “We have to wait for capacityenhancement by chipmakers so that we getsemiconductors to the extent the market requires. So,waiting periods will increase.”
The bottom line An electric vehicle has a far higher requirement forelectronics. So, as the industry moves to an electricfuture, should it delve deeper into electronics?
Complexity in silicon fabrication may yet prove abridge too far to do it all in-house, but the currentcrisis is indicative of the need to develop newcapabilities.
There is a school of thought that believes automakersshould do an Apple by designing their own chips.Indeed, Tesla CEO Elon Musk had talked aboutmoving to chips designed in-house, with Samsungmanufacturing them in the US itself.
But it would pay to be cautious. As Peter Hanbury,
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/… 10/12
ADD COMMENT
10 mins read • By Shishir Prasad ,Shobha Mathur , Kanika Saxena &Nirmal John
AUTO COMPONENTS
A car not made is a car neversold: inside the chip shortagethat has got automakers in apickle
6 mins read • By Joel Rebello & MCGovardhana Rangan
HDFC is seen not just as amortgage company but as a�nancial conglomerate: KekiMistry, CEO, HDFC
6 mins read • By Narendra Nathan
Risks associated withconcentrated stock portfoliosare high now: How diversi�edis your portfolio?
partner at Bain & Company and the leader of itsmanufacturing excellence practice in America, pointsout, “The cultures and capabilities of the twoindustries are very di�erent, which would make it verychallenging for auto OEMs to design their own chips.”
That said, the fact that this conversation is takingplace is signal enough of the work to be done byautomakers as they stumble into an era that will bede�ned by even more electronics.
(Graphics by Manali Ghosh)
The latest from ET Prime is now on Telegram. Tosubscribe to our Telegram newsletter click here.
POPULAR WITH READERS
MORE STORIES ON AUTO + AVIATION MORE FROMAUTO + AVIATION
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/p… 11/12
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
1 2 3 4 5 6 7 8 9
10 mins read • By Ketan Thakkar
AUTO
Skoda Auto Volkswagenrevs up for India 2.0 withmainstream roadmap
10 mins read • ByShishir Prasad ,Shobha Mathur ,Kanika Saxena &Nirmal John
AUTO COMPONENTS
A car not made isa car never sold:inside the chipshortage that hasgot automakersin a pickle
16 mins read • ByTarun Shukla
AVIATION
Jet Airways 2.0:behind-the-scenestory of what’sdelaying India’soldest privateairline’s take-o�
11 mins read • ByShobha Mathur
AUTO
As jostle for thirdrow revs up,Hyundai oilsseven-seater SUVAlcazar.Challengers: Tata,M&M, MG
4 mins read • By MihirMishra
COVID-19 anopportunity forairlines to golong-haul: Airbusexecutive
3 mins read • By MihirMishra
Business jets�ying high asIndians opt forthe privateexperience
Search News, Stock Quotes & NAV
BROWSECOMPANIES:
3/19/2021 chip shortage: Lessons from a USD60 billion hit: an automakers’ guide to rewiring the chip supply chain - The Economic Times
https://economictimes.indiatimes.com/prime/transportation/lessons-from-a-usd60-billion-hit-an-automakers-guide-to-rewiring-the-chip-supply-chain/… 12/12
Follow Us On: Download ET App: SUBSCRIBE TOOURNEWSLETTER
Copyright © 2021 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service
Trending Now
Coronavirus Live news HUL
Joe Biden Live updates Ravi Shankar Prasad
Suryoday SFB IPO subscription
status
Rakesh Jhunjhunwala
Alibaba Bitcoin
What is a Green card Tax slab
What is an H-1b visa Sovereign gold bond
Best ELSS funds Large cap funds 2021
Best mid cap funds 2021 What are debt mutual funds
Aadhaar card guide
Popular Categories
News Live! Markets Live !
Stock Screener MF Screener
Tax-Saving Guide Candlestick Screener
Sunday ET Covid Updates
ET500
Hot On Web
Latest news Live Joe Biden
Covid Live updates Mutual funds SIP 2021
Sensex today Rakesh Jhunjhunwala
What are multi asset funds What are balanced mutual funds
Global markets Mutual funds
Breaking news LTC Cash Voucher Scheme
SGX Nifty Sensex Live
IRCTC share price Infosys share price
Rupee
In Case You Missed It
SUndar Pichai Kamal Haasan
Punjab night curfew Easy Trip Planners IPO
Coronavirus Live updates Latest news Live
Edelweiss ARC China news
Asaduddin Owaisi IAF MiG 21 plane crash
H1b visa Tax savings guide 2021
Arbitrage funds Large & mid cap funds 2021
Best aggressive hybrid funds 2021 HDFC balanced advantage fund
Mutual funds
ET Verticals
Auto News Retail News
Health News Telecom News
Energy News IT News
Real Estate News Marketing & Advertising News
Technology News CFO News
IT Security News
More From Our Network
इकनॉिमक टाइ� Pune Mirror Bangalore Mirror
Ahmedabad Mirror ItsMyAscent Education Times
Brand Capital Mumbai Mirror Times Now
Indiatimes महारा�� टाइम् �ಜಯ ಕ��ಟಕ
Go Green AdAge India Eisamay
IGN India IamGujarat Times of India
Samayam Tamil Samayam Telugu Miss Kyra
Bombay Times Filmipop MX Player
Newspaper
Subscription
Times Prime Colombia
NBT Gold Podcast Ei Samay Gold Podcast MX ShareKaro App
MX TakaTak App
Other Useful Links
About Us Subscribe to ET Prime
Create Your Own Ad
Advertise with Us Terms of Use & Grievance Redressal
Privacy policy
RSS DNPA Code of Ethics
Book your Newspaper Subscription
Contact Us
Services
Longwalks App
