The supply of semiconductor chips has been witnessing a reallocation due to the slowing demand for computers and mobile phones while the supply is improving. This reallocation is particularly seen in the automobile industry as per the ratings agency CRISIL. It said that the demand-supply dynamics is expected to be more balanced by 2025-26 and the ship shortage is easing slowly. Here, as automobile manufacturers had not placed substantial orders for chips, they were caught off guard.

By then, production lines had been prioritized for the computer and communication equipment (C&C) segment, where demand had surged for personal computers, laptops, and mobile phones, driven by work-from-home, virtual learning, and remote healthcare services. Currently semiconductor chip supply is concentrated across C&C segment (63 percent), which is followed by automobiles (13 percent) and then the consumer and industrial segment (12 percent).

"The chip shortage faced by Indian passenger vehicle makers is easing, with current availability at 85-90 percent of the total requirement. The production loss on account of the chip shortage, which had halved to 300,000 passenger vehicles (PVs) year-on-year in 2022-23, is estimated to have further declined to under 200,000 PVs by the end of September 2023," said Anuj Sethi, senior director at Crisil Ratings.

The highest among all automobile types, PVs consume nearly 1,500 chips on average. The demand is set to increase as more advanced electronic features are incorporated. Electric PVs use almost twice as many chips as internal combustion engine (ICE) PVs. driven by the gradual rise in EV adoption and growing demand for advanced feature-laden ICE vehicles, demand for chips will continue to increase over the medium term in India, according to CRISIL.  

Naren Kartic K, associate director, CRISIL Ratings stated, "India currently meets its chip demand through imports. The government has allocated $10 billion for the development of the semiconductor ecosystem in a bid to cater to rising demand and reduce import dependence. This includes offering incentives of up to 50 per cent of the project cost to support the establishment of foundries." 

To set up plants in India, the center has been in contact with numerous chip makers. Rajeev Chandrasekhar, Union Minister of State for Electronics and IT,  said that the ministry will start setting up the Bharat Semiconductor Research Centre in 2024. Chandrasekhar said that the notion would be to create, within India, the capabilities of being a leader in semiconductor research for the coming 10 years.

Naren further added, "That said, given India's nascence in the field, successful joint ventures with established global players and commissioning of facilities will be crucial." As large semiconductor fabs, could present medium-term supply-chain risks and will bear watching, CRISIL also said that any delay in commissioning and stabilizing operations at new facilities or geopolitical conflicts in countries.