Chip Shortage Hurt Demand For Cars In August, Brokerages Say

Indian carmakers continue to be hammered by the global shortage of semiconductor chips—used to control steering to emissions and braking in cars—that's hampering production.

Factory-gate shipments of passenger cars fell over the preceding month in August, according to a BloombergQuint poll of analysts from Dolat Capital, Emkay Global and Motilal Oswal.

“Automobile sector is facing a double sword impact due to shortage of semiconductor and rising raw material and fuel costs,” Dolat Capital said in a note, adding although retail demand is improving month-on-month, the worsening chip crisis continues to hit dispatches especially in passenger vehicle and premium two-wheeler segments.

The stress on supply chains comes at a time when carmakers that emerged from disruption caused by the pandemic’s second wave, which resulted in sales tumbling in May, are witnessing revival in demand. The second wave has already stalled a nascent recovery in the sector following the disruption caused by the last year’s national lockdown.

Emkay Global said car volumes should fall sequentially amid supply challenges amid higher Covid-19 cases in Asian countries that are part of the semiconductor supply chain. “PV (passenger vehicle) industry volumes are expected to be around 254,000 units, while retails are likely to be higher by around 10%,” it said.

Carmakers, including Maruti Suzuki India Ltd., Toyota India and Mahindra & Mahindra Ltd. have revised downward their dealer targets because of their inability to supply vehicles, Dolat Capital said. “Retail demand is 30-40% higher than wholesale resulting in inventory much below normal level.”

Two-Wheeler Sales Rise

On the other hand, brokerages expect demand for motorbikes to recover. “Two-wheeler demand is showing signs of recovery led by festive demand during Onam and Eid, resumption of offices in urban cities (supporting scooter sales) and improved financial support,” Dolat Capital said, adding inventory levels have fallen to normal level.

Two-wheelers and commercial vehicle sales rose between 0.91% and 14% month-on-month in August amid signs of demand recovery. Sales of Escorts Ltd. fell 0.92%, while that of Mahindra & Mahindra’s tractor arm dropped 11.94%.

Motilal Oswal, however, said higher fuel prices are restricting the pace of recovery of two-wheeler segment and is instead driving customers’ interest in battery-powered scooters.

In the commercial vehicle segment, too, demand has started to show initial signs of recovery with increasing freight availability.

“Infrastructure demand is returning as the monsoons have weakened,” analysts at Motilal Oswal said, adding financiers are aggressive in funding any demand from large fleet operators, but are stringent in funding small fleet operators. “Inventory in the system is moderately higher than normal levels of 30 days.”

Tractors sales have slowed over the preceding month owing to seasonality, the brokerages said, adding the segment will witness mixed volume performance in the domestic market.

• Motilal Oswal expects supplies to tighten in the domestic passenger vehicle segment in September.

• According to channel checks by Emkay Global, an inventory build-up among two-wheeler dealers is expected before the festive season in anticipation of higher volumes.

• Despite short-term hiccups, Dolat Capital expects growth momentum in the commercial vehicle segment to sustain in the medium to long term, driven by pick-up in infrastructure, construction and mining activities.