Why are Indian automakers battling with a 6.5 lakh units backlog?

Total passenger vehicle sold in India rose 19.06 per cent, at 2,75,788 units in June as compared to 2,31,633 units sold in the corresponding month a year ago, according to SIAM data. The passenger car segment witnessed a growth of 9.03 per cent, selling 1,32,342 units as compared to 1,21,378 units sold a year ago.

Sales of SUVs went up by 32.07 per cent, selling 1,33,076 units as against 1,00,760 units sold in the same month a year ago.

Most analysts are turning bullish on auto stocks as volumes recover across segments on the back of easing commodity prices (steel and aluminium) and oil prices.

In the last one month, the Nifty Auto Index rallied 16.11 per cent, which is far better performance when compared to any other sector during the same period.

The Nifty Auto index has increased 25.54% to 12,634.20 points (as of July 22) from its 52-week low of 9,226.95. In the last one year, the index has gained 23.43%.

Since the beginning of the year, it has increased by approximately 1,879 points, to 12,634.20 from 10,755. The index hit a fresh 52-week high of 12,690 in Friday's trade, while three other stocks, Eicher Motors, TVS Motor Company, and Bajaj Auto also hit fresh 52-week highs on the same day.

However, the semiconductor supply, which has affected the industry for over two years, is still continuing.

Chip shortage still continues

Leading carmakers are grappling with a huge backlog of around 6.5 lakh units, with a chip shortage continuing to crimp their manufacturing activities and lead to a long waiting period for customers, PTI reported.

From Maruti Suzuki to Kia India, all major car makers are facing the brunt of the crisis.

The country's largest carmaker, Maruti Suzuki India, alone has a backlog of around 3.4 lakh units, while Hyundai and Mahindra & Mahindra have a combined pending order list of about 3 lakh units, the report said.

Mahindra's flagship XUV700 SUV has the longest waiting period among all cars currently sold in India. The waiting period for the XUV700 stretches up to nearly two years.

Tata Motors, Kia, and Honda Cars are also sitting on substantial pending orders.

A Tata Motors spokesperson said the waiting period for its passenger vehicle range stretches between 4-12 weeks, depending on model variant and colour.

"And for electric vehicles, it is going up to 6 months," the spokesperson said.

Further, Honda Cars India Director (Marketing and Sales) Yuichi Murata said the supply-side challenges, including a worldwide chip shortage, have affected its production and despatches since last year, leading to longer waiting periods for customers.

"Unfortunately, this situation still persists, and we are trying our best to address this situation," he said.

Further, he said the company has been prioritising the production of fast-selling models and variants to cater to the demand effectively. The waiting period for company cars varies anywhere from 2 to 9 months.

"As per our estimates, there should be a backlog of around 6.5 lakh units across the passenger vehicle market." "For Maruti Suzuki alone, the figure has crossed the 3.4 lakh mark," Maruti Suzuki India Senior Executive Director (Marketing and Sales) Shashank Srivastava told PTI.

He said, enhancing production is the only way out of the situation.

"The last two quarters have been above the nine lakh mark (sales) for the industry. It is the first time ever in the Indian auto industry that we have crossed nine lakh sales in consecutive two quarters. It means that demand remains very strong in the market, "Srivastava said.

"The pending order list has grown due to chip supply issues, which have been continuing for nearly two years now,"adding that it will take time to resolve the backlog. He said, going ahead, with enhanced production, it will come down with time.

How did it all start?

The chip crisis dates back to March 2020, when the pandemic forced automakers to shut down plants and temporarily halt orders from suppliers. At the same time, the electronics industry faced increased demand for cell phones, televisions, computers, games, and home appliances from customers abiding by stay-at-home orders, according to media reports.

This has led chipmakers to reroute their supply to the electronics industry, which has also shown a willingness to pay more for silicon wafers.

At the same time, the auto industry came back faster than expected in the summer of 2020. It experienced a shortage of chips as suppliers were content to keep their more favourable contracts with others. Big orders can't be met quickly, it takes about three months to make even the simplest of semiconductors.

Further, the Russian-Ukraine crisis has added additional woes to the supply chains. The western sanctions on Russia have halted the global supply of key raw materials needed in the production of automobiles and semiconductors.

Currently, Russia is one of the largest producers of palladium, which is essential for memory and sensor chips, along with several other rare-earth metals.

On the other hand, Ukraine is a leading producer and exporter of "Neon Gas" which is used for several processes in the manufacturing of semiconductors, like etching circuit designs into silicon wafers to create chips.

Ukraine makes more than 90% of the high-grade neon in gas-phase lasers used to make chips produced by U.S. semiconductor companies. The gas is a bi-product of Russian steel manufacturing which is purified in Ukraine, said market research company Techcet.

In the last two years, the shortage has impacted the production of vehicles, consequently, elongating waiting periods and escalating costs.

Relief for the Indian Automobile sector

Vedanta and Foxconn signed a memorandum of understanding in February to form a joint venture company to manufacture semiconductors in India. Vedanta will finalize a location for its $20 billion semiconductor and display plants in India by next month and expects to roll out the first chip product in two years, its chairman, Anil Agarwal, said. 

The oil-to-metals conglomerate is in talks with several Indian states on the unit's location. Vedanta has a total planned investment outlay of $20 billion for two separate units for chip and display manufacturing, Mint reported. The first phase of Vedanta's project will entail an investment of $2 billion. 

"India needs to import $15 billion worth of semiconductors." It’s because of the shortage of semiconductors that we haven’t been able to run our factories at 100%. We manufacture glass and optical fibre. So, it was natural for us to move into semiconductors. " Anil Agarwal told Mint. 

In December, the Indian government approved a $10 billion incentive plan to attract semiconductor and display manufacturers, as part of a deepening push to establish the country as a global electronics production hub. Under the plan, India's government will extend fiscal support of up to 50% of a project's cost to eligible display and semiconductor fabricators.

India estimates its semiconductor market will reach $63 billion by 2026, compared with $15 billion in 2020.

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