de en
Nexia Ebner Stolz

International

Shortage of semi-conductor chips slowing down the automotive industry

2021 was a re­cord-brea­king year for the glo­bal mer­gers and ac­qui­si­ti­ons with the num­ber of an­noun­ced deals in­cre­asing by an un­pre­ce­den­ted 24% com­pa­red to 2020. Deal va­lues that were pu­bli­cly dis­clo­sed re­cor­ded an all-time high of USD 5.1tn which was a good 57% hig­her than in 2020. Alt­hough many of the deals may have been pus­hed to 2021 due to the pan­de­mic ef­fects in 2020, all in­di­ca­ti­ons point to ano­ther char­ged year in 2022.

Even though the Indo-Ger­man trade cor­ri­dor did not re­cord ma­jor deals in 2021, the coun­tries in­di­vi­dually re­cor­ded high growth fac­tors. Ger­many re­cor­ded the ma­jo­rity of the deals in the DACH re­gion with the grea­test stir cau­sed by the take­over of Deut­sche Woh­nen by Vo­no­via. Out of a to­tal of 1,696 deals in the DACH re­gion in the first half of 2021, Ger­many ac­coun­ted for 76% of the deals at 1,292 deals.

In In­dia as well, mer­gers and ac­qui­si­ti­ons hit an all-time high in 2021 dri­ven mainly by first time buy­ers. The dis­rup­ti­ons led by the Co­vid-19 pan­de­mic fur­ther ac­ce­le­ra­ted the ac­qui­si­tion trend in In­dia, where com­pa­nies have been opting for the ac­qui­si­tion route to se­cure hig­her ra­tes of growth. As per data by fi­nan­cial mar­ket tra­cker Re­fi­ni­tiv, M&As in In­dia re­ached a th­ree-year high af­ter deals worth USD 90.4 bn were struck in the first nine months of 2021. 

As a ge­ne­ral rule, most of the deals that have ta­ken place bet­ween Ger­many and In­dia in the past re­volve around the au­to­mo­tive sec­tor. Ger­many, con­side­red to be the birth­place of au­to­mo­bi­les, with its world-class R&D fa­ci­li­ties, com­plete in­dus­try va­lue chain in­te­gra­tion and highly qua­li­fied work­force have crea­ted an in­ter­na­tio­nally com­pe­ti­tive au­to­mo­tive en­viron­ment. In­dia on the other hand emer­ging as a glo­bal hub for auto com­po­nent sour­cing make the coun­tries an ideal match. The au­to­mo­tive in­dus­try is key to both In­dia and Ger­many and the in­dus­try is trans­for­ming at an alar­ming rate with elec­tri­cal ve­hi­cles now com­ing into the li­me­light. His­to­ri­cally, In­dia has been ori­en­ting towards Eu­ro­pean stan­dards and tech­ni­cal re­gu­la­ti­ons which have not only sa­ved a con­side­ra­ble amount of time and ef­fort for In­dia but has also gi­ven ac­cess to emer­ging tech­no­lo­gies and in­no­va­tion. 

That being said, the au­to­mo­tive in­dus­try in In­dia is cur­rently ex­pe­ri­en­cing a tre­men­dous slow down cau­sed by the world­wide se­mi­con­duc­tor chip shor­tage es­pe­cially in the pas­sen­ger ve­hi­cle seg­ment. In­dia has re­cor­ded a loss of at­least ap­prox. 0.5mn units of pro­duc­tion loss in the pas­sen­ger ve­hi­cle seg­ment. 

How did the shor­tage in se­mi­con­duc­tors chips come about? Se­mi­con­duc­tors are si­li­con chips that ca­ter to con­trol and me­mory func­tions in pro­ducts that could range from au­to­mo­bi­les to cell pho­nes and va­rious other elec­tro­nic items. There are two main re­asons for the shor­tage of these chips. One is the in­crease in the usage of se­mi­con­duc­tors in the au­to­mo­tive in­dus­try over the last few years in line with tech­no­lo­gi­cal ad­van­ce­ments and new mo­dels in­cor­po­ra­ting more and more elec­tro­nic fea­tures such as Blue­tooth con­nec­tivity, na­vi­ga­tion, dri­ver as­sist fea­tures, etc. Ac­cor­ding to the Cen­trum IB Au­to­mo­tive Up­date in Fe­bru­ary 2022, elec­tro­nics cost as a per­cen­tage of to­tal ve­hi­cle cost world­wide has ri­sen from 22% in 2000 to 40% in 2020. The se­cond re­ason ap­pears to be the ef­fects of the glo­bal pan­de­mic play­ing out gra­dually. The stron­ger than ex­pec­ted de­mand re­co­very across in­dus­tries has left the in­dus­try re­eling with acute shor­ta­ges and waiting time. The power failure af­ter the po­lar vor­tex in Te­xas, fire in Re­ne­sas unit in Ja­pan du­ring early 2021, lock­down re­stric­tions in key supply geo­gra­phies (Ma­lay­sia and Thai­land) have fur­ther si­gni­fi­cantly im­pac­ted the auto com­po­nent supply chains in In­dia which cur­rently im­ports 100% of its se­mi­con­duc­tor chip needs. 

Re­cog­nising the shor­tage and the lo­wering of pro­duc­tion across di­verse in­dus­tries which pea­ked in Sep­tem­ber 2021, In­dia in its Union bud­get 2022 an­noun­ced a USD 10bn in­cen­tive plan to at­tract se­mi­con­duc­tor ma­nu­fac­turers to es­ta­blish units in the sub­con­ti­nent. As part of its plan to es­ta­blish In­dia as a glo­bal elec­tro­nics pro­duc­tion hub, In­dia will ex­tend fi­nan­cial sup­port of up to 30% - 50% of a pro­ject’s cost to eli­gi­ble ma­nu­fac­turers. Some com­pa­nies that have shown an in­te­rest in this op­por­tu­nity in­clude Is­rael’s Tower Se­mi­con­duc­tor, Fo­xconn, United Mi­cro­elec­tro­nics Corp, Fu­jitsu, In­tel and AMD. Howe­ver, apart from the for­eign com­pa­nies, Tata Group also an­noun­ced plans to in­vest up to USD 300mn on a se­mi­con­duc­tor as­sem­bly and test unit and Ve­danta, ano­ther lo­cal com­pany an­noun­ced its in­ten­tion to in­vest USD 15bn on a se­mi­con­duc­tor plant as well. 

The In­dian se­mi­con­duc­tor in­dus­try is cur­rently va­lued at USD 15bn in re­ve­nues and is esti­ma­ted to grow to USD 63bn by 2026. Will the Go­vern­ment’s in­cen­tive de­ci­sion turn the coun­try into a glo­bal chip­ma­ker and will this in turn give power to the Indo-Ger­man M&A cor­ri­dor is so­me­thing the deal ma­king in­ves­tors will be ea­gerly awaiting. With both lo­cal and in­ter­na­tio­nal com­pa­nies sei­zing the op­por­tu­nity, the glo­bal se­mi­con­duc­tor shor­tage might just be sol­ved even­tually. 

Alt­hough eco­no­mic op­ti­mism re­mains high and the fac­tors that contri­bu­ted to the re­cord M&A mar­ket in 2021 will re­main a large in­flu­ence in 2022, one of the les­sons that the pan­de­mic has dealt out to the deal ma­kers is to stay alert to the new ac­ce­le­ra­ted pace of change that can have si­gni­fi­cant im­pacts on the deals as well as the in­dus­try. We at Eb­ner Stolz are here to ad­vise you and guide you th­rough your deal ma­king jour­ney not just in Ger­many but world­wide th­rough our glo­bal Ne­xia part­ner.

back to top