China is driving up the automotive value chain, and is shooting to go all the way up to automotive chips. Only a few years ago Chinese cars consisted of cheap knock-offs of western brands—who remembers the SCEO HBJ6474Y? But over the past decade, China has gradually made progress.
Now, its new EV startups are starting to produce some stunning, and original-looking cars. At my company we have seen a growing interest in the Chinese automotive market as we help more and more automotive tech companies enter the Chinese market.
It’s not just the end product. When it comes to EV batteries, by some measures, China is leading the world.
Stewart Randall is Head of Electronics and Embedded Software at Intralink, an international business development consultancy which helps western tech businesses expand in East Asia.
The modern car is extremely complex. The average car has at least 50 chips, and electronics account for over 40% of the entire bill of materials. Who is supplying these chips, what do is the chips’ function, and what companies in China are moving into this market?
These questions have been brought to the fore recently as Chinese automotive companies faced a chip supply shortage that has led to some minor production halts.
The pecking order
The global automotive semiconductor market is worth around $41 billion and may grow to $65 billion in the next couple of years. At $41 billion, it accounts for around 12% of the entire semiconductor market.
Less than 3% of global sales of automotive semiconductors come from Chinese companies. European firms make up about 37%, American ones around 30%, and Japanese ones around about 25%. Only one of the 20 top global automotive semiconductor companies is Chinese, and even that one is a spin off from NXP that was acquired by a Chinese company, its headquarters is still in the Netherlands.
With the growing need for autonomous driving capabilities, processing power within cars is increasing. So much so that a car today is more of a computer with wheels.
There is a range of different types of chips in a car, from simple to complex. The main types are control chips, analog and mixed signal power chips, sensors, wireless communications, interface chips, and memory chips.
It is no secret that China has huge automotive ambitions, but why does it still make up such a tiny portion of the overall automotive chip market?
Well, one big reason is that this market is difficult. It’s difficult for a lot of reasons, but not so difficult they can’t be overcome. Any company new to the market needs to be patient and prepared to spend a lot of time not making money before they get anywhere. Some companies used to consumer market chips just aren’t prepared for this.
Product and supplier requirements
Unlike chips for normal consumer products—which China is quite good at designing — automotive chips, like any component going into a vehicle, have much more stringent requirements. Automotive chips must be able to withstand much wider temperature ranges, be resistant to vibrations, shocks, anti-interference, and have very low failure rates.
Automotive companies usually require single digit defects per billion parts, and even sometimes zero defects. By comparison, industrial grade chips usually require less than one part per million, and consumer grade chips a few parts per thousand. All this reliability and consistency, must be achieved at mass production and each part of the product must be traceable, including packaging and even raw materials.
That’s not all.
Having the best and most reliable chip for a certain function out there isn’t always the most important thing for automotive companies. They need to know that the chip manufacturer can keep producing the same chip consistently over a long period of time.
The chip must last not only at least as long as the vehicle is on the road, usually over 15 years, but also be available for as long as the vehicle manufacturer produces the car model, at least 30 years. So, supply chains must be reliable and stable for decades.
To make sure semiconductor suppliers meet the requirements, carmakers require their suppliers to pass industry standards tests. Using these benchmarks, they can identify suitable suppliers. The most common standards are AEC-Q100 for reliability, ISO 26262 for functional safety, and ISO/TS 16949 for quality management.
All these standards make it difficult for any semiconductor company to enter the automotive industry. Completing the relevant tests, submitting the documents, getting certified for all relevant standards for your chip, making sure your suppliers meet the standards too, and then becoming an approved supplier for an carmaker, can take two to three years—at best.
Manufacturing and legal costs compound on these quality management bills.
The level of quality required in automotive chips means that much of the industry players are integrated design manufacturers (IDMs), meaning that they manufacture chips as well as design them. This ensures that not just the design process is automotive compliant, but also the manufacturing and packaging processes. This means there is much more upfront capital expenditure to enter the market than if one was just setting up a fabless company.
Legal costs can also rack up. Semiconductor suppliers in the car industry often have joint liability if something goes wrong with the chip, and so may bear some costs for product replacement, compensation, and fines. Any company thinking about entering the industry will be overly cautious and may decide it is not worth it.
Even if a new entrant decides it is willing to bear all these costs and passes all the standards requirements, convincing carmakers to buy their chips will be an uphill battle. Older semiconductor suppliers, and carmakers already have strong supply chain relationships that can be very difficult to break into.
Who is doing well and what can China do?
Chinese automotive chip companies can be placed into three main categories; acquired, mature companies moving into automotive space, and newly emerging companies.
China’s largest automotive chip companies have come via acquisition. The likes of Nexperia (acquired by Wingtech), ISSI (acquired by Ingenic), and Omnivision (acquired by Will Semi), are all world leading in their specific fields, MOSFETs, memory, and image sensors respectively. Companies in the second category, like Huawei, or new entrants, like Semidrive and Horizon, are China-focused, for now—but they have global ambitions.
I think it is foreseeable China takes up more of the market, especially domestically. China could even start creating its own automotive standards to make it easier for them.
In the next article I will discuss what some of these Chinese companies are doing in the field of automotive chips, what their plans are, and how successful I believe they will be.
READ MORE: SILICON | Can China make chips?