The global shortage of semiconductors will moderate the growth in India's passenger vehicle (PV) sales to 11-13 per cent in the ongoing financial year, 400-600 basis points lower than what it would have been without the scarcity, CRISIL Ratings said on Tuesday.
The ratings agency analysed data from India's top three PV original equipment makers (OEMs), with a combined market share of about 71 per cent, to reach this conclusion.
Explaining the reason for semiconductor or chip shortage, CRISIL said the pandemic induced uncertainties led to sharp swings in orders by OEMs, which account for 10-12 per cent of global chip demand. This led to chip makers diverting their supplies towards other sectors such as consumer electronics, which saw significant surge in demand, especially during the stay-at-home period of the pandemic.
"Poor inventory planning by OEMs, chip hoarding by Chinese companies, and natural disasters affecting major chip factories further exacerbated the problem. Besides, logjams at ports have also affected shipment of chips this fiscal," it said.
Chips are crucial components of vehicles, which facilitate a wide array of features such as navigation, infotainment and traction control. Premium cars with advanced safety and entertainment features need more chips compared with the base models.
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While the shortage has led to production losses for OEMs, the waiting period for some models has increased from 2-3 months to 6-9 months for customers, it added. CRISIL said the chip shortage is expected to continue into the first quarter of next fiscal, with capacity addition not keeping pace with demand, and long lead times of 12-18 months to set up a greenfield facility.
"To be sure, OEMs are doing what they can, such as diverting chips to high demand segments such as utility vehicles (51 per cent of sales in the first half of this fiscal vs 42 per cent in the first half of last fiscal) from mid-segment vehicles including sedans, and prioritising the production of premium PVs, which, too, are seeing strong demand. Some OEMs are even removing features from certain models, to conserve chip usage," it added.
CRISIL Ratings Senior Director Anuj Sethi said that since the pandemic began, preference for personal mobility has increased, leading to more-than-expected demand for PVs. Besides, consumers have also been preferring vehicles with more electronics-driven features, or a higher semiconductor quotient.
"The upshot of the chip shortage has been PV production cuts, which will have a bearing on the ongoing festive season as well when sales are typically higher. Consequently, we foresee tempered overall growth for PVs this fiscal," he added.
Besides the impact on operating leverage due to production losses, higher prices of metals can also dent operating profitability of OEMs by 100-150 basis points to 6.5-7 per cent this fiscal, the agency's team leader Mayuresh Korde said. "However, their credit profiles will remain stable driven by still healthy cash flows, strong balance sheets and robust liquidity," Korde added.
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