Will China-Taiwan tensions worsen India's chip shortage?

Speaking at Mahindra & Mahindra’s Annual General Meeting recently, its Chairman Anand Mahindra said one of the key reasons for the long waiting period for delivery of vehicles is the supply chain disruption. In his words, the availability of semiconductors had slowed down to a trickle.

Caused by pandemic supply chain disruption combined with stronger-than-expected demand recovery, the global chip shortage over the past two years is refusing to go away. 

India’s biggest carmaker Maruti Suzuki said it could not produce 51,000 units in the April-June quarter because of this. 

According to the second-largest carmaker Hyundai India, which expects the semiconductor situation to improve only next year, the demand is outstripping the supply.

In the April-June quarter, the domestic passenger vehicle sales stood at 9.1 lakh units, a 41% growth compared to 6.46 lakh units last year. PV sales are on track to touch a new record this fiscal beating their FY19 peak. 

But the geopolitical fallout of a top US official’s visit to Chinese-claimed Taiwan earlier this month is threatening to prolong the chip shortage. 

US House Speaker and long-time China critic Nancy Pelosi’s visit was the highest-level US visit to the self-governing island democracy in 25 years. 

Her one-day trip worsened the tensions between China and Taiwan. An outraged China reacted by launching its biggest ever military drills in the seas around Taiwan, which is home to the world's biggest contract manufacturer of semiconductors, TSMC, and its peer UMC.  

They are major suppliers to global tech giants, auto companies and producers of consumer electronics. TSMC alone makes 80% of microcontrollers used in cars.

China's military exercises, which included firing live missiles and deploying fighter jets, bombers and warships around Taiwan, disrupted key trading routes for cargo and commodities sailing around the world. 

For the first time, the Chinese army practised operations aimed at a blockade of the island.

China suspended exports of natural sand to Taiwan and halted imports of fruit and fish products from the island.

Quartz sand, a type of natural sand, is an important raw material for chip manufacturing. 

On August 10th, China’s military said exercises held around Taiwan in response to Pelosi’s visit had concluded while pledging to continue regular patrols near the island.

Saket Mehra, Partner and Auto Sector Leader, Grant Thornton Bharat says chip situation was easing from the start of 2022. China’s drills will have a two-three quarter supply chain impact. OEMs will largely meet the festive season demand, he says. 

The Indian Cellular and Electronics Association estimates that foundries in Taiwan account for more than 75% of the chips that mobile devices made in India need.

The number is slightly lower at 60% if one considers all chips -- those of consumer electronics, PCs, laptops, automobiles, etc.

With the festive season coming up, how are India’s smartphone manufacturers placed amid the latest geopolitical tensions? 

Navkendar Singh, Associate Vice-President, Devices Research, IDC India says, Taiwan is important for China too. Indian smartphone makers have enough chip supply. But currently, the problem is on the demand side not supply side. There will be price increases leading up to the festive season, he says.

For the smartphone industry, a slowdown in demand is the bigger challenge. India’s smartphone shipments fell 1% in the first half of 2022.

World chip sales growth has also been declining for six straight months. Semiconductor sales rose 13.3% in June, down from 18% in May, according to the World Semiconductor Industry Association. 

A chip shortage will however hobble the automotive industry for a few more quarters. 

Having said that, experts believe a blockade on Taiwan’s exports or widening of sanctions to cover semiconductors is unlikely as it’s also not in the interest of China given its heavy reliance on Taiwan for advanced chips.