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Semiconductor chips shortage

Context:

  • A protracted shortage of inputs, especially semiconductor chips, has made India-based car manufactures and premium bike makers curtail production across categories.
  • While carmakers in India appear to be waiting to ride out the chip famine by constraining production, their global counterparts have got more creative in addressing the shortage.

Relevance:

GS-III: Industry and Infrastructure (Industrial Policy and Indigenization of Production and Technology, Government policies and Interventions)

Dimensions of the Article:

  1. Indian electronics sector
  2. Why did the chip famine occur?
  3. What is the impact of the chip famine?
  4. Trend in importance of semiconductor chips

Indian electronics sector

  • The Indian electronics sector is tremendously growing with the demand expected to cross USD 400 billion by 2023-24.
  • Domestic production has grown from USD 29 billion in 2014-15 to nearly USD 70 billion in 2019-20 (Compounded Annual Growth Rate of 25%).
  • Despite the impressive growth of electronic production in India, the net value added by production units is very low. The net value addition ranges between 5% and 15%, as most components are imported rather than locally sourced.
  • In the era of global supply chains, the value addition at the final stages of production is very low, especially in electronics because the more complicated processes, involving greater value addition, occur prior to assembly, in ‘upstream’ industries.
  • Currently, these imports nearly constitute 80% of these components, with approximately 67% of the imports coming from China alone.
  • In the absence of foundries (semiconductor fabrication plants where microchips are produced), India has to rely on foreign contractors to produce microchips. –[ There are about 170 commercial foundries globally but India does not have a single one.]
  • Chip manufacturers like Intel, TSMC and Samsung choose other countries instead of India citing uncertain domestic demand and poor cost efficiencies here.

Why did the chip famine occur?

  • The trigger point was the beginning of the Covid-19 pandemic and the subsequent lockdowns across the world that forced shut crucial chip-making facilities in countries including Japan, South Korea, China and the US.
  • This is coupled with a 13% increase in global demand for PCs owing to some countries’ shift to a stay-at-home economy. This has impacted the availability of key chips necessary for the manufacturing of a broad range of electronics being a necessary component of every industry.
  • A key feature in a chip shortage is that it almost always causes cascading effects, given that the first one creates pent-up demand that becomes the cause for the follow-up famine.

What is the impact of the chip famine?

  • Consumers of semiconductor chips, which are mainly car manufacturers and consumer electronics manufactures, have not been receiving enough of this crucial input to continue production.
  • Chip shortage is measured in chip lead time, which is the gap between when a chip is ordered and when it is delivered.
  • With just-in-time deliveries, carmakers typically kept low inventory holdings and relied on an electronics industry supply chain to feed production lines as per demand. There were two reasons for this: a steady decline in input prices and improvements in the processing power of chips.

What are global carmakers doing?

  • In addition to delaying vehicle deliveries, some companies have reportedly started discarding features and high-end electronic capabilities on a temporary basis to deal with the chip shortage.
  • Some companies are leaving navigation systems out of thousands of vehicles and stopped offering digital components and parts like screen.

Trend in importance of semiconductor chips

  • The number of transistors mounted in IC circuit chips has doubled every two years.
  • Notably, the increase in chip consumption over the last decade is also partly attributable to the rising contribution of electronic components in a car’s bill of materials.
  • Electronic parts and components today account for 40% of the cost of a new internal combustion engine car, up from less than 20% two decades ago. Chips account for a bulk of this increase.

-Source: The Hindu

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September 2022
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