Why are Vehicle Prices in India Rising?

Vehicle prices in India have risen since the country was hit by the Covid-19 pandemic two years ago. Toyota India increased the prices of Fortuner and Innova Crysta in early July. Tata Motors hiked prices of its commercial vehicles by 1.5 percent to 2.5 percent from July 1st.

Why are automobile prices rising?

The primary reason for the price increase is a supply chain bottleneck caused by semiconductor chip shortages and rising commodity prices, including metals. The Russia-Ukraine war has made the situation even worse, as both countries are major suppliers of semiconductor components.

Semiconductors are used to make electronic devices including laptops, mobile phones, washing machines and cars. All major economies are reeling under the pressure of semiconductor supply shortages.

Semiconductor Shortage

Russia supplies 25-30 percent of palladium, a key component in chip manufacturing. Ukraine supplies 25-35 percent of the world's purified neon gas, which is also used in chip manufacturing. The war made it impossible for the supply chain to function normally.

The COVID-19 pandemic and the lockdowns to contain it have forced companies to let their employees work from home. This led to a boom in demand for devices such as laptops and mobile phones, but the supply of chips was limited. "Semiconductor demand in 2020 and 2021 exceeded pre-pandemic forecasts in nearly all industries. And that means automotive OEMs and Tier 1 suppliers are increasingly competing for chips with companies in other industries," Mckinsey said in a June 10th.

The chip shortage is expected to continue for at least several years, consulting firms said. “After closely examining the industry, including these recent supply and demand trends, we have concluded that the semiconductor shortage will likely persist in selected technology nodes for at least the next three to five years,” said Mckinsey.

Info Source:  Business Standard

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