How China Became Ground Zero for the Autochip Shortage

From his small office in Singapore, Kelvin Pang is willing to bet a salary of $23 million that the worst of the chip shortage isn’t over for automakers – at least in China.

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

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

“Automakers have to eat,” Pang told Reuters. “We can afford to wait.”

The 58-year-old, who declined to say how much he paid for microcontrollers (MCUs), makes a living by trading surplus electronics inventory that would otherwise be scrapped, connecting buyers in China with sellers in the stranger.

The global chip shortage over the past two years – caused by pandemic supply chaos combined with booming demand – has transformed what was a high-volume, low-margin trade into one with the potential for wealth-generating transactions, he says.

Automotive chip order times remain long around the world, but brokers like Pang and thousands like him are focused on China, which has become ground zero in a crisis that the rest of the industry is gradually overtaking.

Globally, new orders are sustained for an average of about a year, according to a Reuters survey of 100 automotive chips produced by the top five manufacturers.

To counter the supply shortage, global automakers like General Motors, Ford and Nissan decided to secure better access through a playbook that included negotiating directly with chipmakers, paying more per part and accepting more. of inventory.

For China, however, the outlook is bleaker, according to interviews with more than 20 people involved in the trade, from automakers, suppliers and brokers to experts at the Chinese government-affiliated automotive research institute CATARC.

Despite being the world’s largest car producer and leader in electric vehicles (EVs), China depends almost entirely on imported chips from Europe, the United States and Taiwan. Supply tensions were heightened by a zero-COVID lockdown in Shanghai’s auto hub that ended last month.

As a result, the shortage is more acute than elsewhere and threatens to dampen the country’s electric vehicle momentum, according to CATARC, the China Automotive Research and Technology Center. A fledgling domestic chipmaking industry is unlikely to be able to keep up with demand in the next two to three years, the report said.

Pang, for his part, sees the shortage in China continuing until 2023 and considers it dangerous to hold stocks after that. The only risk from this point of view, he says: a more marked economic slowdown which could reduce demand sooner.

Forecasts “hardly possible”

Computer chips, or semiconductors, are used by the thousands in all conventional and electric vehicles. They help control everything from airbag deployment and emergency braking automation to entertainment systems and navigation.

The Reuters survey conducted in June took a sample of chips, produced by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas, which perform a diverse range of functions in cars.

New orders through distributors are suspended for an average of 49 weeks – until 2023, according to the analysis, which provides an overview of the global shortage but not a regional breakdown. Delivery times range from six to 198 weeks.

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

“As the geopolitical and macroeconomic situation has deteriorated in recent months, reliable assessments regarding the end of the current shortages are hardly possible at this time,” Infineon said in a statement.

Taiwanese chipmaker United Microelectronics told Reuters it was able to reallocate some capacity to auto chips due to weaker demand in other segments. “Overall, we continue to struggle 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 to more than 100 applications in an average car – they are currently only getting 100. about 80.

Urgent search for fries

Tight supply conditions in China contrast with improving supply prospects for global automakers. Volkswagen, for example, said in late June that it expected chip shortages to ease in the second half.

The chairman of Chinese electric vehicle maker Nio, William Li, said last month that it was difficult 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 for production.

In late May, Chinese electric vehicle maker Xpeng Motors made the case for chips with an online video showcasing a Pokemon toy that had also sold in China. The dancing duck-like character waves two signs: “urgently needed” and “chips”.

“As the automotive supply chain gradually recovers, this video captures the current status of our supply chain team,” Xpeng CEO He Xiaopeng said on Weibo, saying his company was struggling. to get the “cheap chips” needed to build cars.

All roads lead to Shenzhen

The rush for workarounds has driven automakers and suppliers to China’s main chip trading hub, Shenzhen, and the “gray market,” traded supplies legally sold but not authorized by the original manufacturer, according to two people familiar with the trade at a Chinese electric vehicle maker and automotive supplier.

The gray market carries risks because chips are sometimes recycled, mislabeled, or stored in conditions that damage them.

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

Pang said many Shenzhen brokers were newcomers attracted by the surge in prices but unfamiliar with the technology they were buying and selling. “They only know the part number. I ask them: do you know what it does in the car? They have no idea.”

Although the volume held by brokers is difficult to quantify, analysts say it is nowhere near enough to meet demand.

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

When supply normalizes, there could be an asset bubble in unsold chip stocks in Shenzhen, analysts and brokers have warned.

“We can’t hold out for too long, but neither can the automakers,” Pang said.

Chinese self-sufficiency

China, where advanced chip design and manufacturing still lags its foreign rivals, is investing to reduce its dependence on foreign chips. But it won’t be easy, especially given the stringent requirements for auto-grade chips.

MCUs account for about 30 percent of the total cost of chips in a car, but they are also the most difficult category for China to achieve self-sufficiency, said Li Xudong, senior director of CATARC, adding that domestic players n only entered the low end. market with chips used in air conditioning and seat controls.

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

Chinese electric vehicle maker BYD, which started designing and manufacturing IGBT transistor chips, is emerging as a domestic alternative, CATARC’s Li said.

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

Over time, China could build a strong domestic industry as it did when it identified battery production as a national priority, Shih added.

“It led to a lot of waste, a lot of failures, but it also led to two or three giants who now dominate the global market.”

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