How China Became Ground Zero for Auto Chip Shortages

How China Became Ground Zero for Auto Chip Shortages

How China Became Ground Zero for Auto Chip Shortage

Taipei/Shanghai/Singapore:

From his small office in Singapore, Calvin Pang is set to pay $23 million that the chip’s worst shortfall isn’t over for automakers — at least in China.

Mr. Pang has purchased 62,000 microcontrollers, the chips that help control a range of functions from car engines and transmissions to electric vehicle power systems and charging, costing the original buyer in Germany $23.80 each.

He is now looking to sell them to auto suppliers in Shenzhen’s Chinese tech hub for $375. He says he has turned down offers of $100, or $6.2 million for the whole bundle, which is small enough to fit in the back seat of a car and packed in a warehouse in Hong Kong for now.

“The automakers have to eat,” Mr Pang told Reuters. “we can wait.”

The 58-year-old, who declined to say what he paid for the microcontroller (MCU) himself, makes a living the business creates excess electronics inventory that would otherwise be wiped out, connecting buyers in China with sellers abroad .

Global chip shortages over the past two years — caused by pandemic supply chaos combined with rapidly rising demand — have turned a high-volume, low-margin business into one with the potential for money-spinning deals, he says.

Automotive chip order times are long around the world, but brokers like Mr. Pang and thousands like him are focusing on China, which has become ground zero for a crisis that the rest of the industry is slowly moving into.

Globally, new orders are supported for about a year on average, according to a Reuters survey of 100 automotive chips produced by five major manufacturers.

To counter supply shortages, global automakers such as General Motors Co., Ford Motor Co. and Nissan Motor Co. have moved to secure better access through a playbook that involves interacting directly with chipmakers, per part. Involves paying more and accepting more inventory.

For China, however, the outlook is bleak, according to experts from China’s government-affiliated auto research institute CATARC, interviewing more than 20 people involved in the business from vehicle manufacturers, suppliers and brokers.

Despite being the world’s largest producer of cars and a leader in electric vehicles (EVs), China is almost entirely dependent on chips imported from Europe, the United States and Taiwan. Supply strains have been compounded by a zero-COVID lockdown in auto hub Shanghai that ended last month.

As a result, the shortage is more acute than anywhere else and threatens to halt the country’s EV speeds, according to the China Automotive Technology and Research Center, CATARC. It says that a budding domestic chipmaking industry is unlikely to be in a position to cope with the demand within the next two to three years.

Mr. Pang, for his part, sees China’s shortages continuing through 2023 and considers it dangerous to hold inventories after that. One risk to that approach, he says: a sharp economic downturn that could dampen demand earlier.

Forecast ‘hardly possible’

Computer chips, or semiconductors, are used by the thousands in every conventional and electric vehicle. They help control everything from applying airbags and automating emergency braking to entertainment systems and navigation.

A Reuters survey conducted in June took a sample of chips manufactured by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesa, which perform a variety of functions in cars.

According to the analysis, new orders through distributors are on hold for an average lead time of 49 weeks – deep into 2023, which provides a snapshot of the global shortfall, though not a regional breakdown. Lead times are between 6 and 198 weeks, with an average of 52 weeks.

German chipmaker Infineon told Reuters it was “vigorously investing in and expanding manufacturing capabilities around the world” but said the shortage for chips outsourced to foundries could last until 2023.

“As the geopolitical and macroeconomic situation has worsened in recent months, a credible assessment of the end of the current shortage is hardly possible,” Infineon said in a statement.

Taiwanese chipmaker United Microelectronics Corp told Reuters it was able to reallocate some capacity to auto chips due to weak demand in other segments. “Overall, it is still challenging for us to meet the aggregate demand of customers,” the company said.

Trendforce analyst Galen Tseng told Reuters that if auto suppliers required 100 PMIC chips – which control the voltage from the battery in more than 100 applications in an average car – they could only get around 80 currently. Were were

urgent demand for chips

The tight supply situation in China is in stark contrast to the improved supply outlook for global automakers. For example, Volkswagen said in late June that it expected chip shortages to subside in the second half of the year.

William Li, president of Chinese EV maker Neo, said last month that it was hard to predict which chips would be in short supply. Nio regularly updates its “risky chip list” to avoid shortages of any of the more than 1,000 chips needed to run production.

In late May, Chinese EV maker Xpeng Motors pleaded for the chips with an online video featuring a Pokémon toy, which was also sold out in China. A character like a bobbing duck gives two signals: “demand urgently” and “chips.”

“As the car supply chain slowly recovers, this video captures the current state of our supply-chain team,” Xapeng CEO He Xiaopeng posted on Weibo, adding that his company is manufacturing cars. was struggling to secure the required “cheap chips”.

All roads lead to Shenzhen

According to two people familiar with the Chinese EV manufacturer and business, the scramble for a workaround has led vehicle manufacturers and suppliers to China’s main chip trading hub Shenzhen and the “gray market”, brokered supplies sold legally, But the original is not authorized by the manufacturer. an auto supplier.

There is a risk in the gray market because chips are sometimes recycled, improperly labeled, or stored in conditions that would have damaged them.

“Brokers are very dangerous,” said Masatsune Yamaji, research director at Gartner. They said their prices were 10 to 20 times higher. “But in the current situation, many chip buyers need to rely on brokers because authorized supply chains cannot support customers, especially smaller customers in automotive or industrial electronics.”

Pang said that many Shenzhen brokers were newcomers attracted by the price hike, but were unfamiliar with the technology they were buying and selling. “They only know the part number. I ask them: Do you know what it does to the car? They have no idea.”

While it is difficult to gauge the volume with brokers, analysts say it is not enough to meet the demand.

“It’s not like all the chips are hidden somewhere and you need to bring them to market,” said Ondrej Burki, senior partner at McKinsey.

Analysts and brokers cautioned that when supplies return to normal, the inventory of unsold chips in Shenzhen could lead to an asset bubble.

“We can’t hold on for very long, but automakers can’t hold on either,” Pang said.

Chinese self-sufficiency

China, where advanced chip design and manufacturing still lags behind foreign rivals, is investing in reducing its reliance on foreign chips. But it won’t be easy, especially given the strict requirements for auto-grade chips.

MCUs make up about 30% of the total chip cost in a car, but they are also the hardest category for China to achieve self-sufficiency, Nio’s Li said, adding that domestic players had entered the low end of the market with only chips. . Used in control of air conditioning and seating.

“I don’t think the problem can be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We are relying on other countries, in which 95% of the wafers are imported.”

Li Xudong, a senior manager at CATARC, said Chinese EV maker BYD, which has begun designing and manufacturing IGBT transistor chips, is emerging as a domestic alternative.

“For a long time, China has seen its inability to be completely independent on chip production as a major security weakness,” said Victor Shih, a professor of political science at the University of California, San Diego.

Over time, China could build a strong domestic industry as it recognized battery production as a national priority, Shih said.

“It caused a lot of ruin, a lot of failures, but then it also gave birth to two or three giants that now dominate the global market.”

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