Talking about two-wheelers, Hero MotoCorp has increased the prices of motorcycles and scooters on July 1. Apart from this, all the automakers have increased the prices of their vehicles continuously in the last two years. But the question is why are companies doing this?
Why are the prices of vehicles increasing?
The primary reason for the increase in prices is supply chain bottlenecks due to shortage of semiconductor chips and rising commodity prices, including metals. The Russo-Ukraine war has worsened the situation, as both countries are major suppliers of components for semiconductors.
Semiconductors are used to make electronic devices including laptops, mobile phones, washing machines and automobiles. All major economies are under pressure from semiconductor supply constraints. The COVID-19 pandemic and the lockdown to contain it have prompted companies to make their employees work from home.
This spurred demand for devices such as laptops and mobile phones, but the supply of chips was limited. A report noted that “demand for semiconductors in 2020 and 2021 exceeded pre-pandemic forecasts across almost all industries.”
The report further explained that “this means that automotive OEMs and Tier-1 suppliers are increasingly competing with companies from other industries for chips.” As people stayed indoors during the lockdown, the demand for vehicles fell.
How did the semiconductor shortage happen?
Automobile companies cut orders for chips to reduce inventory costs, but were running low when demand started picking up by the end of 2020. Russia supplies 25-30 percent of palladium, a key component in the production of chips.
Ukraine, on the other hand, supplies 25-35 percent of the world’s pure neon gas, which is also used to make chips. War has made it impossible for the supply chain to function normally. At the same time, another factor in this is also the increase in oil prices.
A McKinsey report said semiconductors are transported by air and the price of air turbine fuel (ATF) has gone up. Consultancy firms have said chip shortages are expected to continue for at least a few years.