How China Became the Basis for Car Chip Shortages
Although China is the world’s largest automaker and leader in electric vehicles (EVs), it relies on imports from Europe, the United States, and Taiwan for almost all of its chips.
From his small Singaporean office, Kelvin Pang is ready to bet a $23 million salary won’t end the carmaker’s worst chip shortage — at least in China.
Pang bought 62,000 microcontrollers, chips that help control various functions from car engines and transmissions to electric car power and charging systems, costing the original buyer US$23.80 each in Germany.
Now he wants to sell them to auto suppliers in China’s Shenzhen technology center for $375 a piece. He said he rejected offers of $100 apiece, or $6.2 million, for the entire package, which was too small to fit in the back seat of a car and is now packed away in a warehouse in Hong Kong. The 58-year-old, who declined to say how much he paid for the microcontrollers (MCUs), conducted a live sale of surplus electronic stock that would otherwise have been disposed of and linked up with Chinese buyers from overseas sellers.
Global chip shortages over the past two years – due to pandemic supply unrest coupled with rising demand – have changed the potential for large volume short-margin trading. the deal revolves around wealth, he said.
Ordering hours for auto chips remain long around the world, but brokers like Pang and thousands like him are focusing on China, which has become a focal point for a crisis that has slowed the industry.
Globally, new orders are supported for almost a year on average, according to a Reuters survey of 100 automotive chips by five leading manufacturers.
To reduce supply pressure, global automakers such as General Motors Co., Ford Motor Co., and Nissan Motor Co. But the outlook for China is murkier, according to interviews with more than 20 people involved in the trade, from automakers, suppliers, and brokers to experts at the CATARC automotive research institute. with the Chinese government.
Although China is the largest automaker and leader in electric vehicles (EVs), it relies almost exclusively on chips imported from Europe, the United States, and Taiwan. Supply tensions have been boosted by the Shanghai Auto Center’s zero COVID lockdown that ended last month.
As a result, the deficit is worse than elsewhere and threatens to dampen the country’s EV momentum, according to CATARC, the China Automotive Technology and Research Center. The new domestic chip industry may not be able to meet demand in the next two to three years, he says. Pang, for his part, saw China’s deficit persisting until 2023 and considered it dangerous to maintain stocks beyond that. One danger in that view, he said: another economic slowdown could push demand sooner.
Profession “almost impossible”
Computer chips, like semiconductors, use thousands in every conventional and electric car. They help control everything from airbag activation and emergency braking automation to entertainment and navigation systems. A Reuters poll conducted in June sampled chips made by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas that perform various functions in cars. New orders through distributors have been suspended for an average delivery time of 49 weeks – until 2023, according to the analysis, which paints a picture of a global shortage, though not devastation to the region. Delivery times range from 6 to 198 weeks, with an average of 52 weeks.
German chipmaker Infineon told Reuters it was “investing massively and expanding production capacity worldwide” but said a shortage of chips outsourced to foundries could last until 2023.
“As the geopolitical and macroeconomic situation has increased in recent months, reliable estimates of the end of the current deficits are now almost impossible,” Infineon said in a statement.
Taiwanese chipmaker United Microelectronics Corp. told Reuters it was able to devote some capacity to automotive chips because of weak demand in other segments. “Overall, it is still a challenge for us to meet overall customer demand,” the company said.
TrendForce analyst Galen Tseng told Reuters that while auto suppliers need 100 PMIC chips — which regulate battery voltage for more than 100 applications in a typical car — currently only about 80 are getting them.
I’m looking for chips right away
Tight supply conditions in China contrast with an improved supply outlook for global automakers. For example, Volkswagen said at the end of June that the shortage of chips should disappear in the second half of the year.
The chairman of Chinese EV maker Nio, William Li, said last month that it was difficult to predict which chips were in short supply. Nine regularly updates a “chip risk list” to avoid shortages of any of the more than 1,000 chips needed for production.
In late May, Chinese EV maker Xpeng Motors admitted to the chips with an online video showing a Pokemon toy also sold in China. A duck-like character suggests two clues: “find the driver” and “chips”.
“As the automotive supply chain is slowly improving, this video captures the current status of our supply chain team,” Xpeng CEO He Xiaopeng wrote on Weibo, noting that his company is trying to get “cheap chips” needed to make cars…
All the way to Shenzhen
The battle over solutions has drawn automakers and suppliers to China’s main chip trading hub in Shenzhen and the “grey market,” where supplies are sold legally but not authorized by the original manufacturer, according to two people familiar with the business. to a Chinese EV manufacturer and auto supplier.
The gray market carries risks because the chips are sometimes recycled, mislabeled, or stored in conditions that can damage them. “Brokers are very risky,” said Masatsune Yamaji, research director at Gartner, adding that their prices are 10 to 20 times higher. “However, in the current situation, many chip buyers have to rely on brokers because the authorized supply chain cannot support customers, especially small customers from the automotive industry or industrial electronics.”
Pang said many brokers in Shenzhen are newly attracted by rising prices but are unfamiliar with the technology they buy and sell. “All they know is the part number. I asked them, ‘Do you know what it does to the car? They have no idea.’
While the number held by brokers is difficult to quantify, analysts say it is nowhere near enough to cover demand. “It’s not like all the chips are hidden somewhere and you have to bring them to the market,” said Ondřej Burkacký, senior partner at McKinsey.
If supply normalizes, there could be an asset bubble in the stockpile of unsold chips held in Shenzhen, analysts and brokers warned.
“We can’t keep up for long, but neither can automakers,” Pang said.
China, where advanced chip design and manufacturing lags behind foreign competitors, is investing in reducing reliance on foreign chips. But this is not easy, especially considering the strict requirements for auto-quality chips. MCUs account for about 30% of total car chip costs but are also the most difficult category for China to achieve self-sufficiency, according to Li Xudong, a senior manager at CATARC, who added that domestic players only have lower inputs. one. in the market for chips used in air conditioning and seat controls.
“I don’t think the problem will be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We rely on other countries that have imported 95% of the wafers.”
Chinese EV maker BYD, which has begun designing and manufacturing IGBT transistor chips, has emerged as a domestic alternative, CATARC’s Li said.
“China has long seen the inability to be completely independent of a chip factory as a major security vulnerability,” said Victor Shih, a political science professor at the University of California, San Diego.
China could build a strong domestic industry over time, as it did when it recognized battery production as a national priority, Shih added. “It’s led to a lot of waste, a lot of failures, but it’s also led to two or three giants now dominating the world market.”