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)
