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Material shortage may trouble the auto industry as it responds to a good rebound in demand.
Story by Bhushan Mhapralkar

FM The chip shortage started in January 2021. It was in the making for the sometime as industries found their way out a challenging and Covid ravaged 2020. Realising that a good demand rebound was on its way, industries began to rejuvenate their supply network and alas, they were staring at a material shortage; at a chip storage to begin with as their use in almost every gadget or automobile has become a natural occurrence. Starting to emerge in later 2020, chip shortage found attention after the big automakers the world over began facing material shortage of critical electronic parts and modules involving them. The shortage got more news as automakers began pressuring Asia’s key chip making economies, South Korea and Taiwan, to prioritize automotive chips, even if it meant they supplied them less to other, smartphone and computer manufacturing customers. Political pressure to prioritise automakers’ needs may have eased things apart from the experience and knowledge of automakers and suppliers to mitigate supply chain challenges, it is an indication that material shortage may be
here to stay. Mark Liu, Chairman, TSMC, is known to express that it is different from in the past, when allocation of chip production capacity was based on a first come, first served principle.

In India, the shortage of chip-based electronic parts and modules caused automakers to revise their production schedules and targets in the face of a returning demand post a year severely affected by the pandemic. With the already fierce competition among tech companies become cutthroat, the challenge of material shortage is bound to give rise to complex flow arrangements at automakers and suppliers, mentioned an Europe-based industry source. He cited the same as the reason for price increase of autos across the globe by a good three to seven-per cent. Stating that it were the Covid-19 induced disruptions and closures which affected material supply for industries of all nature, the source stressed that electronics manufacturers raced to book more inventory than they would have in the past once deliveries improved to be not caught by the short again. This has a ripple effect where the material shortage involving chips seemed to get worse, he added. Some commercial vehicle manufacturers and many EV manufacturers (that of electric two-wheelers and three-wheelers) in India were affected by the chip shortage as the transition to BSVI and the push for EVs by the governments has been leading to a considerable rise in electronic content onboard every vehicle.

Of the opinion that concepts like IoT, AI and digitisation will become more relevant and define the ways of working at automakers, Vinod Aggarwal, MD & CEO, VE Commercial Vehicles, at a forum, is known to say that an opportunity will be provided by the Covid-19 induced disruption to adopt them – especially digitisation. In chip shortage terms, the adoption of concepts like IoT, AI and digitisation is only going to make it look big unless immediate steps are taken to find ways to ramp up the supply. Chip makers the world over have done that, and in anticipation that the chip shortage would last into 2022 as massive front-loading of demand for chips and other vital components continues. However, for the auto industry, it is not just the chips, another vital material that is causing discomfort is natural rubber. Used in the manufacture of tyres and other auto components like anti-vibration pads, the disruption in the supply of natural rubber is causing trouble. Pointing at stockpiling by China and the devastating leaf disease, sources mention that many tyremakers and those that use natural rubber have began procuring them beyond their current need to be not caught unprepared at a later stage. If this is pushing natural rubber prices up, and in-turn the cost of key automotive components like tyres, the involvement of many small players and their inability to quickly respond to changes or challenges is also said to be yet another reason for natural rubber supply restrictions.

Informing that Thailand, Vietnam, and some parts of India is where natural rubber is found in good quantity, an industry source said that the problem is, the knowledge or the ability to replace nature rubber with petroleum-derived synthetic rubber hasn’t yet reach a stage where such a disruption would be easily overcome. After chip shortage and natural rubber supply constraints, it is copper that is used in critical automotive components like wire harness, starter motor, alternator, radiator, and brake tube, that is in short supply currently. Likely to cause production and supply chain disruption at auto makers and suppliers the world over, and especially at a time when the push towards electrification is growing, copper, it looks like, will globally, move from a position of small surplus in 2020 to a potential deficit of over 200,000 tonnes at the end of 2021. Pointing at March contracts reaching USD 4.12 per lb., the previous high being February 2011 when they reached an all-time high of USD 4.58 per lb., Natalie Scott-Gray, a senior metals analyst at StoneX, expressed that she expects copper demand in 2021 to rise by about five-per cent year-on-year, outstripping supply, which would grow by 2.3 per cent year-on-year. In some areas of the physical copper market, supply is claimed to be at its tightest in years. It is likely to come under even more pressure as smelters in China face shrinking profit margins for processing raw ore into refined metal.
urging copper prices have driven up the share prices for miners of the metal, in some case by double digits. For the auto industry, this would translate into higher input costs and supply chain challenges at in the medium-term. Quipped a source that prices over the medium-term will remain on an upward trajectory in relation to how the secondary market for scrap copper contributes.

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