Semiconductor chip supply constraints put brakes on auto OEM ramp-up

Firms struggle to increase production as supplies yet to fully normalise

The semiconductor chip supply-chain nightmares that had shaken up the automotive (auto) industry during the pandemic may be behind us. But with component supplies yet to fully normalise, automakers are struggling to ramp up production to full capacity.

Ajay Seth, chief financial officer of the country’s largest passenger carmaker Maruti Suzuki India (MSIL), highlighted during the company’s third-quarter (Q3) results of 2022-23 (FY23), the supply shortage of electronic components had marginally increased in comparison to the previous quarter.

“The company could not produce 46,000 vehicles in Q3. Limited visibility on the availability of electronic components is a challenge in planning production. The electronic component shortage is still limiting production volume,” Seth had said.

He added that pending customer orders stood at about 363,000 vehicles at the end of the quarter, of which about 119,000 orders were for recently launched models.

Even as Mahindra & Mahindra (M&M) recently announced capacity ramp-up plans - Rs 10,000 crore for electric vehicles in Maharashtra; Rs 1,000 crore for electric three-wheeler and last-mile connectivity commercial vehicles in Telangana – it is unable to utilise its existing capacity up to the hilt by virtue of supply disruptions.

Rajesh Jejurikar, executive director (ED), M&M, admitted that while the company is on schedule to add capacity, it is unable to take full advantage of it because of disruptions in the global supply chain.

“We have an issue right now with airbag sensors that is impacting our ability to produce the Scorpio and the XUV700. We have created capacity of 39,000 units per month. This is ahead of target. But there will be variability in the ability to deliver, conditional on the dynamic situation of availability of semiconductors or any other part of the supply chain,” he said last week.

There are at least 200 types of semiconductor chips that go into the making of the Scorpio and the XUV700. M&M has open bookings of 266,000 units of the sport utility vehicles yet to be delivered. Of these, 119,000 open bookings are for the Scorpio alone.

Speaking to Business Standard, Piyush Arora, managing director and chief executive officer (CEO) of Škoda Auto Volkswagen India, said that while it is looking positively at 2023 in terms of customer demand, the supply situation will determine what it can cater to the Indian market.

“While the situation over the past two years has become a lot better, we are still not out of the woods. We see disruptions taking place now and then, forcing us to regulate our expectations in terms of planning, as well as meeting customer requirements/orders,” said Arora.

In terms of the supplier situation for semiconductors, it was extremely widespread, he observed. Many of the sub-suppliers were affected. That situation has eased somewhat, he said, adding, “Although only a few suppliers are now impacted, it still influences original equipment manufacturers (OEMs). We are seeing some disruption in Europe at some of our plants, and that mirrors our Indian operations as well.”

On the other hand, Jaguar Land Rover (JLR) has put agreements in place with critical suppliers across high-risk chips, as these provide greater visibility over near-term supply. In the Q3FY23 earnings call, Adrian Mardell, interim CEO of JLR, highlighted that constraints are expected to continue through 2023, notwithstanding improving supply. The company continues to closely manage supply chains to ensure allocation to more ‘profitable’ vehicles.

The JLR order book has grown to 215,000 units.

Mardell said during the call: “So we do think we’ve made a lot of progress on supply, particularly on semiconductors, principally for this calendar year. But there are still challenges, of course. Covid in China is a challenge… And we’ve had to go into the marketplace to buy premium chips to keep the supply going.”

Tata Motors ED Girish Wagh mentioned during the Q3 results that, “semiconductor supplies are back on radar due to emerging Covid situation in some countries… With the Covid situation globally, we did bring the semiconductor supply situation back on our radar… we will continue to keep this, as well as the electric vehicle aggregates, on our radar”.

OEMs are, however, trying to work around this supply chain issue to ensure quicker customer deliveries and better utilisation of capacities.

Rahul Bharti, ED of corporate affairs, MSIL, said during the Q3 earnings call, “We are making a lot of effort in reducing our requirement of semiconductors to the bare minimum. Sometimes for commonisation across platforms, we use a higher specification, the highest common work. We are going variant-wise and reducing the semiconductor requirements so that the same number of semiconductors can service more cars. With de-population and value engineering, we are trying to get the maximum from the market and our suppliers.”

He added that MSIL gets to know only a month in advance how many semiconductors will be available for the subsequent month.

Seth also highlighted during the same call that MSIL’s supply chain, engineering, production, and sales teams are working towards maximising production volume from available semiconductors.

“The supply situation of electronic components continues to remain unpredictable,” he added.