The chips are deployed in automobiles which have electronic control units that coordinate the hardware’s performance

The shortage of semiconductor chips has turned into a rather pressing issue for the automotive sector. The chips are essential because automobiles these days employ a slew of electronic control units (ECUs) that coordinate the performance of their hardware. The chip is the “brain” of the ECU as it’s designed to analyse a number of input parameters and instantaneously direct further action.

The use of ECUs to optimise vehicle performance has thus grown exponentially in new vehicles (across all load classes) as automakers must offer a finely-tuned product to stay competitive. The chip is used in practically all electric functions, including seat adjustments, power locking mechanisms and of course, in fuel efficiency management (fig. 1).

Fig. 1: Some examples of the use of chips in modern cars | Image: Economist Writing Everyday

Also, the modern car has up to 3,000 of these chips and EVs need more of the highest quality chips to function. A new development has been the use of Silicon Carbide (SiC) and Gallium Nitride (GaN) that are reported to help EV batteries recharge twice as fast, and offer 10-15% higher driving range. With the global EV market expected to hit 31 million units by 2030, semiconductor chips will continue to balloon in importance.

The shortage has thus led to automakers such as Ford and GM having to prioritise which of their vehicles should receive the chips, and usually the higher-end vehicles get them over the more mass-market alternatives. The situation has also caused a pileup of inventory at certain automakers’ yards (fig. 2), as the unfinished cars are stacked in rows, waiting for the appropriate chips to become available before being sent to the dealerships.

Fig. 2: Ford trucks at a lot waiting to be fitted with chips | Image: Reuters

What caused the shortage

There are several reasons attributed to the shortage, but largely:

  • The US ban on Huawei in 2019
    This was done over the US’s national security concerns around its firms using Huawei’s equipment.
  • The Covid-19 pandemic
    Several automakers anticipated the demand for new cars to tank during and for some time after the national lockdowns. So they cancelled their chip orders, which were instead taken up by consumer electronics manufacturers. At the same time, chip manufacturing itself took a hit as the factories were shut down. When demand failed to dip to the levels expected and the automakers placed new orders, it was in the middle of a global shortage in production and chips that had been re-routed to other buyers.
  • Extreme weather in Texas
    The extreme weather that hit Texas in 2021 (fig. 3) damaged the sensitive and incredibly expensive equipment used by the likes of Infineon, Sony and NXP to manufacture chips. This added an additional layer of issues for global chip production and the process has been difficult to restore in Texas as it needs a high degree of labour separation, and the expensive equipment itself must be run for weeks at a time at high utilisation rates for the manufacturer to make money.

    Fig. 3: The severe winter storm that hit Texas in 2021 affected semiconductor manufacturers as well | Image: CNN

  • Ukraine-Russia conflict
    Ukraine supplies around 50% of the world’s purified neon gas, which is used extensively in semiconductor manufacturing. Also Russia accounts for 25-30% of global palladium supplies (a rare earth metal) that is used as a metal junction on the chips’ boards. With both countries locked in conflict and Russia under sanctions, their supplies have been hindered.

Why India needs to invest in chip manufacturing

India must position itself as a reliable chip manufacturer as western countries are increasingly looking to decouple their businesses — and economies — from an overwhelming dependence on the Chinese market. Geopolitical concerns about tensions between China and Taiwan are also rife, and this is a problem as Taiwan is home to TSMC (fig. 4), which is the world’s largest chip manufacturer. It holds 56% of the market share and manufactures chips for the biggest industry names, such as Intel, NVIDIA and AMD and Apple. If China were to seize control of Taiwan, global access to its semiconductor chips could very well come under updated terms, and it’s likely that this would involve higher costs or certain conditions.

Fig. 4: TSMC is the world’s largest chip manufacturer | Image: Taiwan Semiconductor Manufacturing

The recent US order to The Netherlands on restricting the exports of high tech semiconductor machinery to China also shows that the west is working on limiting China’s access to the highly sophisticated machinery that it needs to establish its own chip manufacturing capacity. While China may manage to circumvent such measures in due time and introduce its own mass-produced chips, it would raise questions around:

  • Security: this was the issue behind the US’s banning of Huawei in the first place
  • Quality: Chinese goods do not yet command the same degree of confidence as their western counterparts, be it in consumer electronics, automobiles or industrial machinery

India, on the other hand, enjoys good geopolitical relations with almost every western country. More importantly, it offers a skilled labour force that could be as cost-competitive as China’s, if not better, while protecting any entitiy’s IP rights by law.

Recent attempts

Foxconn and Vedanta were in talks with the Indian government to set up a chip manufacturing facility in the country. The deal was valued at ~USD 19 billion, but it fell through after reports about numerous delays.

Yet, Foxconn is reported to have reached out to the Centre independently and may set up its own manufacturing plant in India. The Centre has also signed an agreement with Japan to jointly develop semiconductor chips, while US-based Micron will invest USD 800 million into the country as well.

India is thus taking the right steps to establish itself as a prominent chip manufacturer. Reports indicate that it is already involved in designing them, and locally manufactured chips would be a boon to the country’s automotive sector — particularly EVs. This pathway also serves the larger objective of not just self-reliance, but aligns the country towards one of the most important industries going forward.