Why there is a microchip crisis and how it's affecting auto industry at large?

The global auto industry has been shaken severely by the Coronavirus pandemic and with its devastating effect yet to be faded, the automobile sector is facing another headwind in form of a worldwide microchip crisis, which is basically an aftereffect of the Covid-lockdown announced last year across the world.

The global auto majors are facing severe disruption in the supply chain resulting in production halts, factory shutdown, delivery delay, and what not.

Here is why the microchip crisis has started and how it can impact you?

1

Reasons:

Blame it on lockdown

During the Covid lockdown across the world in 2020, demands for laptops, mobile phones, gaming consoles, and other electronic goods increased multifold, pushing the electronic consumer goods companies to produce more such products, which created a great surge in demand for microchips. The microchip producers started channelizing their resources towards catering to this demand.

Later when the auto industry started reviving and demands of automotive microchips increased, the chipmakers fall short of producing the automotive semiconductors, which resulted in such a massive crisis around the world.

2

Sanction on Chinese technology companies

In 2020, the US announced sanctions against the Chinese technology companies over the issue of data theft. These sanctions too have further exacerbated the ongoing global microchip crisis.

3

Arctic storm and fire at Renesas plant

A severe winter storm in Texas in the US has forced major global microchip manufacturers such as Samsung Electronics Co Ltd, NXP Semiconductors, and Infineon to shut down their respective factories temporarily. Infineon and NXP are among major automotive chip suppliers. The arctic storm clearly caused a huge disruption in the automotive supply chain.

Renesas Electronics Corp accounts for around 30% of the global market for microcontroller units that are used in cars. One of the plants of the company was hit by fire in early March 2020, causing severe disruption. This accident is expected to impact at least 100 days of production across the global automotive industry.

4

Impacts:

Production curtailed

Modern automobiles across segments have become increasingly dependent on chips. From onboard computer management of engines for better fuel efficiency to driver-assistance features like emergency breaking - everything is controlled by the chips. They can be called the brain of the modern car. The recent scarcity of microchips has forced many automakers to curtail the production of their less profitable vehicles.

Global auto giants like General Motors, Ford, Volkswagen, Subaru, Toyota, and Nissan are among the most impacted car companies that have been affected by the crisis. Several auto manufacturers around the world have announced measures like production cut, factory shutdown in order to tackle the problem.

5

Delivery delay

General Motors and Ford are among the automakers that have announced that some of their widely selling vehicles will be built without chips. Later, when the respective chips are available, these cars will get them and will be sent to the dealerships.

Some of the automakers have also announced that they will send the cars to the dealerships without some key chips onboard. These models will receive chips at the dealership level once available. Such measures are resulting in delivery delays or other harassment to the customers as well.

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6

1.3 million vehicles impacted

The shortage of automotive microchips could impact nearly 1.3 million units of global light vehicle production in the first quarter of FY2022 that started on Thursday, speculates research firm IHS Markit.

7

Pricier vehicles

Yes, the consumers might have to shell out extra money for buying cars due to the chip crisis that came as salt in the wound after the Covid crisis. The increasing raw material costs are already resulting in surging prices for vehicles. Not only the vehicle makers but their respective component suppliers too have been impacted by the crisis, as modern cars use several parts that are chip-controlled.

In such a scenario, as the chip availability is scarce and the automakers are focusing on getting chips at extra costs in a bid to keep their vehicle supply to dealerships stable, the increased costs could be passed on to the buyers, leaving the consumers burning their pockets.