INSIGHTS | Automakers scramble for chips

China’s car industry has been among the hardest hit by a global semiconductor shortage, bringing a strong post-Covid recovery to a screeching halt. The shortage has seen Chinese automakers scale back production and adjust their sales targets, as the months-long auto chips drought shows little sign of abating.  

It couldn’t have come at a worse time. The world’s biggest car market had taken the lead in the global recovery, posting a mild single-digit decline in sales last year after business disruptions due to Covid-19. China’s auto sales rebounded 364% year-on-year to nearly 4 million vehicles during the first two months of this year, rising from a low base.

The boom didn’t last long. Vehicle production fell by 37% in February, the third decline in the same number of months, and far larger than January’s 16% drop. Global consultancy AlixPartners estimates up to 1.5 million fewer vehicles will be sold in China this year due to the supply crunch, accounting for 6% of last year’s total auto sales.

Automakers are now being forced to go head-to-head with smartphone companies in the search for chips, bringing more uncertainty to a market that has struggled with a slowdown in demand for years.

Bottom line: A worldwide semiconductor shortage has highlighted the fragility of China’s auto supply chain, as well as its heavy reliance on foreign-made critical technologies. 

• This, along with geopolitical tensions between China and the US, has prompted Beijing to ramp up development of an independent chipmaking industry. 
• Manufacturing of chips that are reliable for autos has long been a challenge for Chinese chipmakers. Analysts expect China to gain independence in less advanced processors over the next few years, while still facing pressure to access cutting-edge auto chips from global suppliers.

Nipped in the bud: Last April, China’s automotive industry recorded sales growth for the first time in two years. This was followed by months of double-digit rebounds. 

• In January, some of the country’s largest automakers, including SAIC, GAC, and Chang’an, halted production at their joint plants with partners including Volkswagen and Toyota. They then slashed output of some models for the first quarter of 2021, blaming the shortage. 
• EV maker Nio warns that its monthly capacity could shrink by a quarter until June. The company expects the shortage to ease in the second half of the year. 
• Although the global supply crunch has affected car sales around the world, analysts expect China to be hit the worst. During the first quarter, the country’s auto sales may have fallen by 250,000 vehicles, or 7%, year on year, market research firm IHS Markit reported. Official sales figures for the first three months of the year have not been published.

What is there a shortage of? Microcontroller units (MCUs), are in particularly short supply. These cheap but essential single-chip computers are used in a variety of car parts including powertrains, chassis, and self-driving systems. 

• On average, a single vehicle uses at least 20 MCUs, IHS Markit said in a February report. 
• Each MCU costs $1 or less, according to analysts, making it hard to compete for manufacturing space. Chipmakers prefer to focus on more advanced, higher-margin products such as powerful graphics processors (GPUs) and artificial intelligence (AI) chips.

Why is there a shortage? Analysts blame chip supply constraints on disruptions from the Covid-19 pandemic. Automakers pulled back production and cut their component orders amid falling vehicle demand. Meanwhile, a spike in demand for laptop computers and gaming consoles during lockdowns resulted in chip suppliers redeploying much of their capacity to consumer electronics. Auto chips became a low priority.

The chips used in cars are mostly built on 200-millimeter (8-inch) silicon wafers with old fabrication techniques. But chipmakers prefer to expand their capacity to produce more advanced semiconductors using newer technologies, UBS analyst Paul Gong told TechNode earlier this month.

When will it get better? 

• Most industry experts believe the shortage will ease in a matter of months, since most semiconductor foundries are running at full capacity and have pledged to invest in output growth.
• “We believe that most of the pent-up demand would be fulfilled in late 2021 or in 2022, assuming the chip shortage is resolved at least by late 2021,” Stephen Dyer, managing director of AlixPartners told TechNode.
• Others have more pessimistic views, forecasting that the Chinese auto industry’s shortage could extend well into 2022, and even persist for up to a decade due to a lack of core skills in China, as well as bilateral trade tensions. 

Can Beijing help? During the annual meeting of China’s legislature earlier this month, Chinese auto giants called on the government to invest more in chip development.

• Chen Hong, president of SAIC, China’s biggest automaker, called for a funding plan for chip development that lowers prices and increases market access of homegrown auto chips. The first step in Chen’s plan would push domestically-made lower-end auto chips, which Chen said could accelerate the build-up of “a reliable, controllable semiconductor supply chain for automobiles” (our translation).
• Yin Tongyue, chairman of Jaguar Land Rover’s manufacturing partner Chery said that a blueprint for developing homegrown car chips should include specific targets for domestic production. A full range of regulatory rules and technical standards for auto chipmaking are also needed, Yin added.
• Wang Fengying, president of Great Wall Motor wrote that Chinese companies should also step up overseas investments to build multinational entities that can secure key parts, including raw materials for batteries and in-car chips from a global supply chain. To achieve that goal, Wang called for more regulatory support and legal guidance for parts makers to expand their overseas presence.

Slow progress: The expanding list of US sanctions on Chinese companies has created a sense of urgency among lawmakers, officials, and businesses. Earlier this month, Beijing pledged to double down on efforts to develop an independent chip industry with incentive policies such as tax cuts, but remained silent on production targets, reported CNBC. 

• China is falling far short of its target to produce 70% of the semiconductors it uses at home by 2025. Less than 6% of integrated circuits were produced by mainland-headquartered companies last year, market research firm IC Insights said in a recent report.
• The situation is even worse in the auto sector. Seven overseas chip powerhouses, including Japan’s Renesas and Germany’s Infineon, make up 98% of the global market.
• Contract manufacturing is concentrated around Taiwan Semiconductor Manufacturing Company (TSMC), which produces around 70% of all shipments today, according to IHS Markit.
• Auto chips make up just 10% of business at the mainland’s leading contract manufacturer, SMIC.
• BYD, the country’s largest EV maker, is producing semiconductors for autos. In October, the company said it had shipped 5 million units of its first generation MCU in the two years since its launch. All were installed in its own cars, and made up less than 1% of the total market.

Emerging domestic supply: Some domestic chip design startups, which focus on design and buy manufacturing capacity as needed, have taken an interest in higher-performance processors for intelligent and connected vehicles. But few are capable of taking on established US chip powerhouses such as Nvidia and Intel’s Mobileye.

• Horizon Robotics might be an exception. In late 2019, it claimed to be the only Chinese supplier of semiconductors that meets automotive requirements. The company relies on TSMC for manufacturing. Chip design is a simpler and cheaper process than operating a chip foundry. 
• The main issue for fabless companies is being successful outside of China, said Stewart Randall, Head of Electronics and Embedded Software at business development consultancy Intralink Group. Randall said that it would be difficult for Chinese chip suppliers to break into global automakers’ supply chains, so they will have to be supported by the government and sustain heavy losses to gain market share.

READ MORE: SILICON | China’s hurdles in making automotive chips

What’s next? As demand for vehicles grows, experts expect Chinese companies to significantly ramp up production of mature semiconductors, including MCUs. 

• The worsening supply shortages could give Chinese companies access to the domestic auto market, Cui Dongshu, secretary general of the China Passenger Car Association, told journalists earlier this month, adding that several companies are securing chip-making equipment to expand their capacity.
• But getting the basics right won’t free Chinese automakers of dependence on global suppliers.
• “It will take much longer for China to catch up and attain self-sufficiency for cutting edge chip design and manufacturing. This is not an easy prospect and will require time, investment, and concerted effort,” Dyer said.