Omicron spectre looms large over chips

The semiconductor shortage has held the industry hostage for some time now, and it is expected to ease by the end of this year.

By Sumana Sarkar calendar 27 Jan 2022 Views icon9786 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Bosch's fab plant at Dresden will focus on automotive chips

Bosch's fab plant at Dresden will focus on automotive chips

The Centre’s recent move to earmark Rs 76,000 crore to incentivise local production of semiconductors is keeping in line with its focus on Atmanirbharta or self-reliance but will it really help is the million dollar question. “While the domestic opportunity is huge, making semiconductors is a complex process. It takes hundreds of precisely controlled steps over several months to make a chip,” says Suresh D, Chief Technical Officer of Spark Minda, the Tier 1 ancillary supplier.

A semiconductor fabrication (or fab) plant costs $10-20 billion and takes 3-5 years to come online. To that extent, the road ahead is “a long one” at least in the Indian context. Yet, there is some reason for hope with chipmakers pledging billions to expand global production in the coming years.

It will clearly take time for fresh capacity to become a reality which only means that it becomes difficult to predict when the current supply situation will ease out. Within the automotive industry, the general consensus is that things will be back on track by the end of this year though this will depend on a host of other factors.

The S&P Global Platts Analytics estimates that the chip shortage is poised to persist through 2022 before supply catches up with demand in early 2023. Suresh D thinks this is a “very optimistic estimate” and is more inclined towards supporting the Boston Consulting Group estimate of the shortage lasting into 2024 before “stabilising in 2025.”

Huge demand

Things will definitely improve, however, towards the end of this year though Indian automakers will have to compete for chips with other industries especially those benefiting by the stay-at-home fallout of Covid-19. The huge demand for mobile phones, notebooks, gaming and wearables like virtual reality headsets only resulted in use of more chips.

As Suresh D says, suppliers consequently shifted their focus to consumer products causing a shortage of auto chips. “In the short-term we expect to continue buying at premium pricing especially when auto barely accounts for 10 percent of the total semiconductor industry,” he adds.

There are other realities to be reckoned with which could play the spoilsport going forward. A fire at Dutch company, ASML’s Berlin plant in the first week of January, could fuel this shortage further given that it is the world’s largest supplier of photolithography systems and the only source of extreme ultraviolet lithography machines. ASML Holding sold $5.81 billion worth of this equipment in just the third quarter of last year.  The fire at the Renensas factory in Japan and the ongoing tensions between China and the US are not helping either.

Human resource crunch

Additionally, reports indicate that the shrinking pool of qualified workers to man the new fabs is only getting smaller due to a global labour shortage. Beyond this is the overwhelming spectre of Omicron which is spreading like wildfire across the planet. Europe and the US are seeing cases surge by the hour and even while the medical fraternity is hopeful that it will not be as catastrophic as the Delta strain, there is no telling what could unveil in the coming weeks and months.

It is this unknown that is worrying automakers since global supply chains could come under pressure all over again. It was not too long ago when the Covid situation and the consequent lockdown in Malaysia caused disruption in chip supplies. If this were to happen all over again with Omicron on the rampage, the chip shortage will only be aggravated.  

The crisis has also exposed the world’s excessive dependence on Taiwan which is home to the biggest semiconductor maker, TSMC (Taiwan Semiconductor Manufacturing Co), which accounts for approximately 60 percent of outsourced chip manufacturing and close to 85-90 percent of profits. 

The top 3 chip companies — Intel, Samsung and TSMC —made $188 billion in revenue in 2020, “as much as the next 12 largest chipmakers combined.” In the foundry space, Taiwan alone accounted for 63 percent of the total global foundry market share in 2020, followed by South Korea at 18 percent and China at six percent. With a near 90 percent market share, TSMC plans to spend $100 billion over the next three years to address the chip shortage. Put in perspective, this is close to 26 percent of the entire GDP of Singapore.

TSMC, Sony plan new factory

TSMC is partnering with Sony for a new $7 billion chip factory in Japan apart from building a $20 billion foundry in Arizona for the 5nm chip. Speculation is rife though that the advanced 3nm chip foundry will continue to be based in Taiwan.

Other key global chip makers are also looking at increasing supply. Bosch, for instance, recently started operation of its new semiconductor fab in Dresden and will focus primarily on automotive microchips.

The semiconductor chip that measures almost one-billionth of a metre is literally dictating the fortunes of the $3 trillion plus global automotive industry. A shortage that almost coincided with the first lockdown to contain Covid globally, it is now having a telling impact on the fortunes of auto sales globally.

Month after month, the shortage of chips is crimping auto sales and India is no exception. Given the fact that a passenger vehicle typically uses around 1,000 semiconductors, a slowdown in the supply chain of chips has literally brought assembly lines to a grinding halt.

Impact on Indian auto

According to independent analysis by independent rating agency ICRA, the Indian passenger vehicles industry will lose about 300,000 cars, two million two-wheelers, 50,000 commercial vehicles and tractors in terms of sales across FY2022 on account of the shortage. This will translate into Rs 3,000-3,500 crores in value

From India’s point of view, its political standoff with China has also complicated matters. “India can benefit from geopolitical factors are also pushing India to reduce its dependence on Beijing,” says Suresh D. This explains why the red carpet is being rolled out for local manufacturing and the country will hopefully emerge as a global hub for electronics with semiconductors as its foundation.

For now, companies will be hoping that the shortage will ease out by the second quarter of FY 23 even while the Omicron overhang cannot be wished away. The order books indicate that customers are queuing up for expensive cars and bikes which use semiconductors and that is a reassuring fact for automakers. Yet, they may not wait forever and that is the biggest challenge in the coming months.


The general consensus within industry is that mankind will have to learn to live with Covid-19 but the aftermath of Delta has left policymakers across the world with little choice but to go in for lockdowns as an extra precautionary measure. Even while these moves have come in for criticism, the truth remains that governments are spooked by the prospects of overcrowded hospitals and rising death tolls.

Whether this will make things worse for the automotive supply chain and industries like semiconductors will get clearer by April when Omicron will hopefully run its course. Till then, automakers will be keeping their fingers crossed and hoping for the best.

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