Just when the global automotive industry was recovering from the aftereffects of the Covid-19 second wave, it is now faced with a brand new challenge: semiconductor shortage. MG Motor India says that due to the global shortage in semiconductor chips, their production levels were impacted in June and this is likely to continue till August.

Rajeev Chaba, president and managing director, MG Motor India tells Fortune India that while some pent up demand is still present, there are also a number of supply constraints. “The only challenge right now is that we’re not able to supply due to the [chip] shortage. We’re able to meet less than 70%-75% of demand right now. That’s the kind of shortage we have and this will continue for the rest of this year,” he says.

While MG Motor India can easily sell around 4000-5000 units of Hector—its flagship SUV brand—Chaba says that the company has to restrict it to 2500-3000 units because of the shortage of chips. “Even if we’re buying the chips, we’re paying a huge premium. I’m paying triple or at least four times the price which brings it to a per car impact of as high as ₹20,000-₹25,000,” he argues.

According to the market research firm, Mordor Intelligence, the global automotive semiconductor market was valued at $48.13 billion in 2020 and is expected to reach $129.17 billion by 2026—making it the world’s fourth most-traded product after crude oil, refined oil, and cars. As car manufacturers enable more and more technology inside the vehicles, the demand for semiconductors—used in various electronic functions like wireless connectivity, high-computing, data storage, etc.—is bound to go up. MG Motor’s cars are one of most technology-enabled products in the market today and they require the semiconductor chips to enable functions such as navigation control, infotainment systems, collision-detection sensors, etc. One of the main reasons for this shortage, experts argue, is the disruption in the global semiconductor supply chain due to the Covid-19 pandemic, inadequate investments and preparedness, and the rising demand in technologies due to the new work-from-home culture.

“We require almost 85 chips per car and there are two-three chips which are unique to India. Every quarter we feel the next one is going to be better. But it’s getting worse in a way. One is chip shortage and second problem is the shipping issues as the cost has gone up due to container shortage,” Chaba points out. “So whatever we produce we’re able to sell right now.”

Chaba said that 10% of the overall sales of chips come from the automotive sector. “The chip stock of the automotive industry went down during the pandemic and now the demand is coming back but we were very late as an industry in ordering and all the chips got diverted to smartphones and other electronic devices because they grew. Diverting the chip back to the auto industry is taking time and building capacity takes almost two years,” he says.

The carmaker retailed 7,139 units during the second quarter of 2021, registering a jump of 162% as compared to 2,722 units sold in the same quarter last year and is hopeful that its fourth launch in the Indian market—slated for Diwali this year—will be a gamechanger.

“With our new launch we will actually start coming into a more mainstream segment which will drive up our volumes as well. Our aim is that our Halol plant which has a capacity of 75,000 to 80,000 units should be full by next year. Right now we’re trying to balance it out. On one hand, we’re trying to secure more supplies and meet the volumes and on the other we’ve to meet the bottom line,” Chaba says.

The upcoming MG One will compete with the likes of the compact SUVs such as the Hyundai Creta, Kia Seltos, Jeep Compass, etc. and will mark MG’s entry into a more affordable segment—and probably help override the supply-side constraints the company is facing at the moment.

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