Semi-Conductor Shortage

ECONOMY/ INTERNATIONAL

• GS-2: Effect of policies and politics of developed and developing countries on India’s interests.
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Semi-Conductor Shortage

Context: The global shortage of semiconductor chips has started making its effect felt in the small and medium-sized enterprises (SME) sector in India.

• As Original Equipment Manufacturers (OEM) slow down production, smaller players are being impacted as their business orders & hence the revenues drying up.

Reasons for Semiconductor Shortage

• Rise in Covid-19 cases in supplying countries, especially those in Asia, led to disruption of production (shutdown of factories) thereby causing the current shortage.
• An atrocious winter storm in Texas shutdown semiconductor factories, and a fire at a plant in Japan caused similar delays.
• Also, relatively low margins of Substrate manufacturing have led to its underinvestment and added to the pain of a global chip shortage 
  • Substrates connect chips to the circuit boards that hold them in personal computers and other devices. 
  • Made up of thin copper wire sandwiched in resin, substrates help transmit user instructions to a computer’s chips and relay the answers. 
  • They are necessary because the ultrathin wiring that comes out of chips can’t tolerate a direct soldered connection to a circuit board
  •  Substrate Manufacturing is therefore seen as a backwater of the global chip supply chain.
  • Supplies of substrates is very tight and small disruption in this underinvested sector is causing big worries to chip manufacturers
• The chief executives of Intel and IBM have both said recently that the chip shortage could last two years.

Semiconductor chips and Automobile sector

• Semiconductor chips are integral parts of the power train, chassis, safety systems, advanced driver assistance systems, and other parts of automobiles. 
• They are used more in passenger vehicles compared to commercial vehicles or two-wheelers
• The move to electric vehicles has led to increased demand of chips. For example, a Ford Focus typically uses roughly 300 chips, whereas one of Ford’s new electric vehicles can have up to 3,000 chips
• With supply of semiconductor chips slowing down, the production in automobile sector is also adversely impacted.

Consequences of chip shortage on automobile sector:

• Due to longer lead time — the time between when the order is placed and the shipment is delivered — the automobile sector has been forced to cut down on its production.
• The slowing down of production by big automotive players has led to reduction in new orders being placed to MSME vendors (who supply parts)
• The MSMEs who are vendors and sub-vendors of the automobile industry are now working just 8 hours instead of the 12 hours they normally do. This has not only affected their earning but is also making them to migrate to other sectors. 
• While the local MSME industrial sector was slowly coming back to normal after the second wave of Covid-19, the recovery has been hampered by the high price of raw material and low orders.

What is being done to address the situation?

• Firms like Samsung, Tata Group are sinking huge investments into semi-conductor production
• The US, Europe and China have committed billions in subsidy to on-shoring production.
• Long-term supply contracts are being signed by automakers

How can India play its role?

• Since, chip fabrication is capital-intensive (an average sized facility costs $7-10 billion) with long gestation and rapid technology, it is difficult for India to strive for self-sufficiency on chip fabrication.
• But, government-owned semi-conductor facilities already operated by ISRO and DRDO can be expanded and upgraded
• Government can attract global manufacturers by showcasing skilled talent pool in R&D, low labour costs, large market and policy support (Production-linked incentive scheme)

Connecting the dots:

• Production Linked Incentive Scheme
• Current Challenges of Indian Economy