Auto industry: Plaguing by Chips shortage

June 18, 2021 (MLN): Global auto industry is currently managing a unique crisis- semiconductor chip shortage which may lead the industry towards shutdowns, cutbacks in production depending upon the dearth of inventory and elevated prices. Leading auto players including Ford, Volkswagen, Jaguar, Land Rover are also facing the supply chain disruptions.

For the unversed, the semiconductor chips are considered one of the most important element/part of the auto vehicle as it is used in vehicle electrification, safety and driver assistance, connectivity, switching, amplification, and energy conversion.

According to report of AKD Securities, the global shortage of semiconductor chips is caused by surge in sales of electronic devices amidst Covid-19, and snowballing of electronic content in cars. In addition to this, Taiwan which supplies 2/3rd of semiconductor chips globally, has received 60% less than the average annual rainfall so far in CY21 due to which the reservoir levels have dropped, further deepening the shortage since production of chips require huge amount of ultra-pure water for cleaning in each step.

The signs of supply catching up are limited in short term while the demand is likely to show a robust growth which has caused the prices of semiconductors to increase by 20.3% in CY20 while the total industry grew by 10.8%YoY to $464bn.

The prices in CY21 are expected to remain on higher side and the industry is expected to reach at $522bn, a growth of 12.5%YoY while the sustainable market for chips is expected to grow at a CAGR of 8% in medium to long term, the report added.

The trickle-down effect of global scarcity of chips has also hit the local market and created a slowdown in luxury SUV and 1300CC+ sedan segment in which consumption of semiconductors chips is higher.  

The slowdown in production is apparent by observing the delays in order fulfillments by HCAR and INDU despite lower utilization, although the order book is healthy.

The report further stated that the average monthly sales of Yaris and Corolla in 11MFY21 were recorded at 3,901 units, 18.5% lower than the peak of 4,788 units in FY16 while the average monthly sales of Civic and City is 2,040 units in 11MFY21 in contrast to the peak of 3,568 units in FY18, down by 43%.

Meanwhile, the Bull Run in CRC/HRC prices in addition to lower utilization have increased the cost of production, putting the margins under pressure. The swelling competition has limited the ability for local OEM’s to pass on the costs to consumers, the report said.

In the view of Saroash Saleem, Investment Analyst at AKD Securities, “The supply of chips will remain under pressure till the end of CY21 while we can expect a slowdown in production to last well into FY22. Assuming the avg. price and margins to remain constant in FY22, an assumption of 5% decline in volume of INDU will result in a decline in EPS by PkR7.6, from PkR156.6 to PkR149.”

With respect to the production level, AKD Securities expects the supply to normalize in CY22 and an increase in production in later half of FY22. Nevertheless, the preference is based on 1300CC+ segment where the new model euphoria is yet to begin for new Honda City and new Toyota Corolla (expected to be unveiled in CY22) to support the sales momentum in medium to long run.

“We continue to like INDU in our coverage (TP: PkR1500/sh) while the possibility of HCAR outperforming cannot be ruled out”, Saroash Saleem highlighted in the report.

In addition to this, AKD has a positive stance on PSMC since the effect of scarcity is minute on account of lower electric content in small cars and major beneficiary of reduction in GST announced in FY22 budget.

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Posted on: 2021-06-18T14:41:00+05:00