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Insights Tag: Chip Shortage

Price Hikes Slow Automotive Industry Recovery

The global automotive industry has been in turmoil since 2020. The industry and its supply chain were initially disrupted by COVID-19, and then by supply chain chaos when the sector was unprepared for the demand rebound.

With the semiconductor shortage beginning to ease, 2022 was expected to be a better year, as indicated by increased sales during the initial months. But Russia’s invasion of Ukraine and fresh COVID waves in China have further delayed the industry’s recovery. Restricted supplies of critical raw materials procured from Ukraine and Russia are causing new supply chain impacts, driving up raw material prices including that of lithium, cobalt and nickel – the latter by 60% – as well as aluminium and, to some extent, steel. Furthermore, gases used in the production of semiconductors are also impacted – although the overall effect is unlikely to be immediately material. To cope with these cost increases, automakers across regions have reluctantly increased their vehicle prices, despite the likely impact on demand.

China

The Chinese automotive sector is contending with a double whammy – subsidy cuts and sharply increasing materials prices. The country’s government cut subsidies on NEVs (New Energy Vehicles) by 30% in 2022. This was long planned but will impact demand right at the point where escalating costs are increasing prices:

  • Tesla increased the price of its cheapest Model Y by more than $2,000 in March. The recent inflationary pressure on raw materials and logistics forced Tesla to then make a further price increase, the second time within a week, which looks like bad planning or miscommunication as much as a forced price increase.
  • Leading Chinese electric vehicle (EV) manufacturer BYD increased prices by $500-$1,000 depending on the model and specifications. BYD is developing and producing LFP batteries in-house but still increased prices twice this year.
  • Xpeng, a rising Chinese EV start-up, followed in the footsteps of larger OEMs to increase prices by $1,500-$3,000. Smaller OEMs may find it harder to control costs and compete with larger OEMs as they have less control over supply chains.
  • Other important auto OEMs such as Chery, SAIC, Hozon Auto and Wuling Motor also announced price increases for NEVs.
  • ORA has been forced to stop taking new orders due to a shortage of chips and other core components.

US

The US recently released its EV policies which are designed to push up EV adoption rates. But the Ukraine crisis and geopolitical tension with China may hinder the country’s plans. The US imports a major portion of its rare earth metal requirement for vehicle production.

  • To become self-sufficient and to keep the EV adoption progress on track, President Biden may include these rare earth metals under the Defence Production Act, which will enable the country’s mining industry to extract and refine these metals. Mining in the US has been restricted due to its environmental impact. Any resumption of broader domestic mining activity will eventually lead to price decreases, but this is not a quick fix.
  • Automakers are increasing prices to deal with supply chain situations and simultaneously building inventories as a hedge against future supply chain shocks. The largest EV manufacturer in the world, Tesla, increased prices by $2,000-$12,500 depending on the model from the third week of March. Ford has made significant price increases across several models. The F-150 Raptor was subject to the biggest increase ($3,300).

Passenger Vehicle Sales in Q1 2022 Counterpoint

Europe

The ongoing Ukraine crisis has forced European automakers to halt production lines as the supply of critical auto parts has been severely hit. Moreover, in solidarity with Ukraine’s fight against Russia, automakers have withdrawn from Russia.

Auto OEMs such as Volkswagen, BMW and Porsche temporarily shut down plants to deal with the supply chain disruption. European automakers are dependent on Russia and Ukraine for the supply of raw materials for battery production, wire harness, neon gas and more. However, the level of dependence isn’t so high, which is one reason European automakers haven’t increased prices compared to other regions. There may be another reason, like profit margins, which are higher for European automakers and can absorb some of the extra costs.

  • Inflation across Europe reached 7.5% in March 2022, up from 5.9% in February. Though no OEMs operating in Europe, except Tesla, have announced price increases so far, we expect them to do so soon. The rising prices of petrol and diesel in Europe have created a favourable market for EVs, so automakers don’t want to disrupt EV demand by increasing prices.

Japan

The Japanese government removed most-favoured-nation (MFN) treatment for Russia over its invasion of Ukraine. This increased import tariffs by 3% to 10%. The demand for aluminium for automotive applications is rising due to the growing demand for lighter-weight products in line with the shift towards electric mobility. For these reasons, the Japan Aluminium Association is also concerned about price hikes, which may slow down BEV adoption in Japan.

  • German automakers Volkswagen and Mercedes-Benz raised prices by an average of 2% and 1% respectively. Jeep increased prices by 13% from March.
  • Japanese automakers including Toyota and Honda are resisting price hikes for now, while Nissan is reducing optional equipment and vehicle grades to cope with increased costs. For example, it is eliminating manual transmissions and narrowing the combination of best-selling models.

India

India’s government had extended its Faster Adoption and Manufacturing of Electric vehicles-II (FAME-II) program by two years until March. This initiative is further supported by the Production Linked Incentive (PLI) scheme for Advanced Chemistry Cell (ACC) battery storage. India is trying to become a world-class manufacturing destination and more self-reliant in terms of production. As India’s automotive industry is dependent on other countries such as China and Japan for automotive parts, it is becoming difficult for automakers to control input costs.

  • Indian automakers are also reacting to raw material price hikes by increasing car prices by at least 2%. KIA Motors has increased prices of all its vehicles. Maruti Suzuki, India’s largest passenger vehicle (PV) maker, has also increased the average price of its cars by 8.8% since January 2022. Toyota, Tata Motors, Hyundai and MG Motors have also increased prices for their vehicles across ranges. Even premium vehicle brands such as BMW India, Mercedes-Benz India and Audi India have announced at least a 3% increase in their vehicle prices.
  • Due to the low EV adoption, high prices of lithium and cobalt have not directly impacted the industry. The price hikes in India are mostly due to the rise in the price of steel. Steel is used in manufacturing vehicle chassis and body. Nickel-containing stainless steel is used in some drivetrain components.
  • In addition to rising materials costs, fluctuating exchange rates and rising operational costs are other factors driving price increases.

Counterpoint’s Take:

The recent cost increases have already affected the EV industry. 2021 saw EV sales rising by more than 200% but price increases are likely to put the brakes on a continuation of this fast growth. However, while EV sales will slow, sales of conventional ICE vehicles will see more significant declines due to the global fossil fuel price inflation. For 2022, we expect global passenger vehicle sales will be around 72 million, some 5 million units lower than our earlier projections.

Related Posts

When the Chips are Down: Governments Move to Address Shortage

If there is one thing that COVID-19 continues to teach us is to not underscore the early signs of any crisis. This holds particularly true for the ongoing chip shortage. The severity of the shortage is nothing less than a famine for the industries affected by it, with recovery nowhere near in sight. The crisis now lurks under almost every electronic product that is part of our lives. The demand-supply gap has exacerbated the already existing supply chain bottlenecks.

Policy Measures To Address Chip Shortage
Policy Measures To Address Chip Shortage

Reaction to tech famine

We all know how this semiconductor crisis started after COVID-19 triggered a mega-surge in electronic equipment demand. The crucial question is what can be done and how soon it must be done. For any economy, the ability to bounce back from a shock or crisis is a sign of it being a resilient economy. However, the ongoing crisis is yet to make even a single economy stand this test. This clearly shows the dangers of taking a monopolistic route to the supply of critical components. Governments across the world are now ramping up solutions by investing in indigenous semiconductor manufacturing and funding research incentives.

Supply chain relook and changing policy interventions

The shortage has not only affected the smartphone and allied space but also industries like automobiles. All this has brought under focus the concentration of global chip manufacturing in a few East Asian countries. Taiwan’s TSMC and South Korea’s Samsung, along with manufacturers in Japan and China, dominate this space globally. This has translated into a relook at the supply chain structure and a renewed focus on ‘self-sufficiency’ in regions like the EU and US, which are now keen to boost their domestic production capacity.

Policy intervention by US

The Biden administration has brought in the Innovation and Competition Act and intends to spend $52 billion for the semiconductors sector. Further, a 100-day review of the supply chain crunch has been conducted. It covered key semiconductor product lines, advanced batteries used in EVs and regulatory changes as well. Biden has unveiled an infrastructure plan worth $50 billion for the American semiconductor industry as a measure to subsidize domestic manufacturing and chip research. The $50 billion amount is expected to go towards production incentives and research and design, including the creation of a National Semiconductor Technology Center.

Policy intervention by EU

One of the most recent and comprehensive measures undertaken to address the chip shortage has been by the European Commission. It recently announced a new plan for a chipmaking ‘ecosystem’ to keep itself competitive and self-sufficient. The commission is planning for a ‘European Chips Act’ that would accelerate the development of advanced semiconductors across the EU region. The Act also proposes to have a semiconductor research strategy and bring together European chip production efforts, along with a framework for international cooperation and partnership. Significantly, as part of the plan, the EU will aim to produce at least 20% of the world’s semiconductors (by value) by 2030, up from 10 % last year.

Policy intervention by South Korea

The next big move is from South Korea, which is currently the second-largest producer of computer chips after Taiwan. In May this year, South Korea announced to spend $451 billion on domestic semiconductor production over the next decade. The said investment will be led by Samsung Electronics and SK Hynix under a national blueprint finalized by the government, along with 151 other companies. The investments will be focused on the “K-semiconductor belt”, a newly named region south of Seoul that hopes to be the epicenter of South Korea’s semiconductor push.

Policy intervention by Taiwan

Taiwan, which has some of the biggest and advanced semiconductor foundries in the world, is also actively working with stakeholders to solve the semiconductor crisis. Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest contract microchip maker, too is likely to invest around $100 billion over the next three years to meet the rising demand for semiconductors. Moving beyond borders, TSMC plans to expand its state-of-the-art semiconductor foundry in Arizona, US, which is also one of its integrated manufacturing units outside Taiwan.

Policy intervention by Japan

Japan too is exploring every opportunity to stay in the race. Its recent release of the Semiconductors and Digital Industry Policy is one such move. From contributing 50% (in the 1980s) to the global semiconductor production to its present share of around 10%, Japan has fallen behind significantly. The government, realizing the strength of its decade-old semiconductor industry, is now keen to do something not only to regain manufacturers’ faith but also to retain the existing ones. The government has also joined forces with TSMC and some 20 Japanese chip-making companies to set up a fab factory by 2023.

Policy intervention by India

India too is readying policy infrastructure to chase its dream of becoming an innovation-driven global manufacturing hub for mobile phones, IT hardware, automotive, industrial and medical electronics, IoT and other devices. After circulating an expression of interest (EoI), the government has now circulated request for proposal (RoP) documents to seek formal applications from companies to set up semiconductor plants in the country. The government had even unveiled a Scheme for Promotion of Manufacturing Ecosystem (SPEC) to offset the disabilities of India’s manufacturing and semiconductor ecosystem and strengthen its stand on ‘Make in India’ and ‘Digital India’ programs. Most recently, NXP India has collaborated with the Ministry of Electronics and Information Technology (MeitY) and Fabless Chip Design Incubator, IIT-Hyderabad, to start a ‘Semiconductor Startup Incubation and Acceleration Programme’ to facilitate semiconductor and IP design start-ups across India.

Situation now

Current production and demand trends suggest that the shortage is expected to continue until the first half of 2022. Foundries are already increasing wafer prices and, in turn, chip companies are increasing prices. One such example is the recent announcement by TSMC, one of Apple’s leading SoC suppliers, to increase chip prices by up to 20%. The crisis is all real and has become one of the key talking points among different governments and business leaders. India Prime Minister Narendra Modi met Qualcomm CEO Cristiano Amon this month during his visit to the US and discussed the need for a diversified semiconductor supply chain, along with other topics including 5G, vRAN and digital transformation.

Twitter - Qualcomm & India Discussions
Qualcomm & India Discussions on Chip Shortage Issues

Risks and anticipations

Although most cutting-edge semiconductor technology comes from the US, the lion’s share of manufacturing goes to East Asia, particularly Taiwan and South Korea. Over 83% of the global foundry revenue is generated by companies headquartered in Taiwan and South Korea. Consequently, the manufacturing facilities, equipment and materials are concentrated in a handful of countries. This makes the economics of semiconductor manufacturing an important geopolitical tool.

Efforts to rejig supply chains by abandoning one market may end up dragging the industry into a new cold war. Even as governments the world over race to deal with this crisis while keeping the geopolitics involved in mind, the winners as we see would be the ones who pursue innovation.

 

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