Events in disparate sectors showed a connected trend in recent months. The decision by Tata Motors and Maruti to cut production was closely connected to the decision of Reliance Jio to put off the launch of JioPhone Next. The link was the shortage of microchips.
Why Microchips shortage
To understand the Microchips shortage across the world, we must understand the demand side first. The pandemic and trends like work-from-home led to a sharp spike in demand for laptops, PCs, smart phones etc. The need to connect to clients and classes via bandwidth intensive lines resulted in a spurt in the demand for microchips. Then there were a slew of smart cars, smart white goods, smart televisions; apart from the regular microchip demand from the electronics and computer world. In short, the demand for microchips was growing exponentially across the world.
The supply side also posed a problem. The manufacture of microchips is a very high-technology and customized job. The supply cannot be increased at short notice. The world’s largest microchip manufacturer, TSMC of Taiwan, has its order books full and fresh capacity is likely to come on stream only in two or more years. This has created mismatch between the demand and supply with limited visibility of fresh supply. That has forced scores of industries to either shut factory factories or reduce output.
How does it impact India?
In the last few years, the use of chips in every product from high-end computers to mobile phones to cars and washing machines and televisions have grown. The impact is already felt in the auto sector that will see reduced output and even production stoppages due to the microchip shortage in the world. These microchips have, traditionally, been a surplus market and hence there has not been much of an inventory build-up by Indian companies. The decision by Jio to put off the launch of its low-cost smart phone is another example. The phones, touted as value for money are highly microchip intensive. In short, there are a number of sectors that are likely to feel the pressure of the chips shortage.
Will it nix the growth engine?
That is the one big risk to really worry about. In the June quarter, India’s GDP has actually got back to pre-pandemic levels of output. India now needs to make up for these 2 lost years of the economy when it went nowhere. For that to happen, manufacturing has to perform in a big way. If sectors like autos, consumer electronics and white goods have to cut production due to shortage of chips, it could be a serious challenge. Automobiles are one of the largest contributors to output, jobs and revenues. The risk is that if there is no Plan-B for the chip shortage, it could actually nix the economy recovery!