Equilibrium Between Chip Demand and Supply Expected By 2026, Says CRISIL

The once-severe global chip shortage that had been a roadblock for India's automotive industry in fiscal years 2021, 2022, and a significant part of 2023 is finally seeing some light at the end of the tunnel. Supply chain hiccups are getting ironed out, and smarter predictive demand forecasting is revving up production schedules, paving the way for a smoother ride ahead.

It is anticipated that the equilibrium between demand and supply will be restored by the fiscal year 2026, with additional global manufacturing capacities set to become operational.

“The chip shortage faced by Indian passenger vehicle makers is easing, with current availability at 85-90 per cent of total requirement. The production loss on account of the chip shortage, which had halved to approximately 3,00,000 PVs on-year in fiscal 2023, is estimated to have further declined to under 2,00,000 PVs by the end of September 2023.” Said Anuj Sethi, Senior Director, CRISIL Ratings

Chips are perhaps the backbone of all electronic devices. The computer and communication equipment sector is the largest chip consumer, accounting for 63 per cent of production, followed by automobiles at 13 per cent, and consumer and industrial sectors at 12 per cent.

Passenger vehicles (PVs) typically require 1,500 chips on average, the highest among all automobile types. Even though most PV manufacturers are running at near-maximum capacity due to strong demand, they still have a backlog of 700,000 new orders as of September 2023, even though chip availability has significantly improved.

The strong rebound in global automobile demand in late fiscal 2022 caught manufacturers unprepared, as chip orders had not been placed. Production prioritized the computer and communication (C&C) sector, driven by remote work, education, and healthcare needs. Geographically, chip production and design are divided, with Western nations leading in design and manufacturing equipment, while semiconductor fabs are concentrated in Eastern nations, primarily Taiwan and South Korea.

In India, chip demand is expected to keep growing in the medium term, primarily due to the increasing adoption of electric vehicles (EVs) and the rising popularity of advanced, feature-rich internal combustion engine (ICE) vehicles.

“India currently meets its chip demand through imports. The government has allocated $10 billion for development of the semiconductor ecosystem in a bid to cater to rising demand and reduce import dependence. This includes offering incentives of up to 50 per cent of the project cost to support establishment of foundries. That said, given India’s nascence in the field, successful joint ventures with established global players and commissioning of facilities will be crucial.” Said Naren Kartic K, Associate Director, CRISIL Ratings.