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How China became the epicenter of the car chip shortage

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How China Became Ground Zero For The Auto Chip Shortage Crunch
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How China became the epicenter of the car chip shortage

TAIPEI/SHANGHAI/SINGAPORE:

From his small office in Singapore, Calvin Pang is willing to bet $23 million that the worst chip shortage problem for automakers is not over yet – at least in China.

Mr. Pang bought 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 original buyer $23.80 each in Germany.

Now he wants to sell them to car suppliers in China’s Shenzhen Technology Center for $375 each. He says he turned down offers of $100 a piece, or $6.2 million for the entire package, which is small enough to fit in the back seat of a car and packaged in a warehouse in Hong Kong for now.

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

The 58-year-old, who declined to reveal how much he himself paid for microcontrollers (MCUs), makes a living trading surplus stock of electronics that would otherwise be scrapped, connecting buyers in China with sellers abroad.

The global chip shortage over the past two years, fueled by pandemic supply chaos, coupled with rapidly growing demand, has transformed what used to be a large-scale, low-margin trade into a trade with the potential for wealth-generating deals, he said.

Lead times for ordering car chips around the world remain long, but brokers like Mr. Pang and thousands like him have focused their attention on China, which has become the epicenter of the crisis that the rest of the industry is slowly emerging from.

According to a Reuters survey of 100 automotive chips produced by the top five manufacturers, globally, new orders are backed up for an average of about a year.

To cope with supply cuts, global automakers such as General Motors Co, Ford Motor Co and Nissan Motor Co moved to provide better access through a scenario that included direct negotiations with chipmakers, higher pay per part and acceptance of more inventory. .

However, the outlook for China is bleaker, according to interviews with more than 20 people involved in the trade, from automakers, suppliers and brokers to experts at China’s state-run automotive research institute CATARC.

Despite being the world’s largest car manufacturer and leader in electric vehicles (EVs), China relies almost entirely on chips imported from Europe, the US and Taiwan. Supply disruptions were exacerbated by the COVID-19 lockdown at Shanghai’s auto hub, which ended last month.

As a result, the shortage of electric vehicles is more acute than anywhere else and threatens to hold back the development of electric vehicles in the country, according to CATARC, the China Center for Automotive Technology and Research. It says the nascent domestic chip industry is unlikely to be able to keep up with demand over the next two to three years.

Mr. Pan, for his part, believes China’s shortages will persist until 2023 and sees it as dangerous to hold stocks after that. The only risk to that view, he said, is a sharper slowdown in economic growth that could cut demand sooner.

Forecasts “hardly possible”

Computer chips or semiconductors are used by the thousands in every conventional and electric vehicle. They help control everything from airbag deployment and automatic emergency braking to entertainment systems and navigation.

The Reuters survey in June selected chips from Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas that perform a variety of functions in cars.

New orders through distributors are delayed by an average of 49 weeks, all the way to 2023, according to an analysis that provides insight into global shortages rather than regional breakdowns. Lead times vary from 6 to 198 weeks, with an average of 52 weeks.

German chip maker Infineon told Reuters it is “strongly investing and expanding manufacturing capacity around the world” but said the shortage of chips outsourced to foundries could last until 2023.

“As the geopolitical and macroeconomic environment has deteriorated in recent months, reliable estimates of an end to the current deficit are unlikely to be possible now,” Infineon said in a statement.

Taiwanese chip maker United Microelectronics Corp told Reuters that it has been able to reallocate some of its capacity to making chips for cars due to weaker demand in other segments. “Overall, we continue to struggle to meet aggregate customer demand,” the company said.

TrendForce analyst Galen Tseng told Reuters that if car suppliers require 100 PMIC chips that regulate battery voltage to more than 100 applications in the average car, they are currently only getting about 80.

Urgently looking for chips

Tight supply conditions in China contrast with improved supply prospects for global automakers. Volkswagen, for example, said at the end of June that the chip shortage would decrease in the second half of the year.

The chairman of Chinese electric car maker Nio, William Li, said last month that it’s hard to predict which chips will be in short supply. Nio regularly updates its “risk chip list” to avoid running out of any of the more than 1,000 chips it needs to start production.

In late May, Chinese electric car maker Xpeng Motors asked for the chips by posting an online video of a Pokemon toy that was also sold out in China. A bouncy duck-like character is waving two signs: “urgently looking” and “chips”.

“As the car supply chain gradually recovers, this video reflects the current state of our supply chain team,” Xpeng CEO He Xiaopeng wrote on Weibo, saying his company is struggling to get the “cheap chips” needed to make cars.

All roads lead to Shenzhen

The fight over detours has led automakers and suppliers to China’s main chip trading hub in Shenzhen and a “gray market,” brokering supplies sold legally but not authorized by the original manufacturer, according to two people familiar with the Chinese electric car maker’s trade and auto supplier.

The gray market is risky because chips are sometimes recycled, mislabeled, or stored in conditions that cause them to become damaged.

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

Pan said many Shenzhen brokers were newbies, drawn in by the price surge 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 a car? They have no idea.”

While the volume brokers own is hard to quantify, analysts say it’s not enough to meet demand.

“It doesn’t mean that all the chips are hidden somewhere and you just need to bring them to the market,” said Ondrej Burkacki, senior partner at McKinsey.

Analysts and brokers warn that when supply normalizes, stocks of unsold chips held in Shenzhen could form an asset bubble.

“We can’t hold out for too long, but the automakers won’t last either,” Pang said.

Chinese self-sufficiency

China, where cutting-edge chip design and manufacturing still lags behind foreign competitors, is investing to reduce its reliance on foreign chips. But it won’t be easy, especially given the tough requirements for auto-class chips.

MCUs account for about 30% of the total cost of chips in a car, but they are also the most difficult category for China to achieve self-sufficiency, Nio’s Li said, adding that domestic players have only entered the lower end of the market with chips. used in air conditioning and seat control systems.

“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 as 95% of waffles are imported.”

Chinese electric vehicle maker BYD, which started designing and manufacturing IGBT transistor chips, is becoming a domestic alternative, said Li Xudong, senior manager of CATARC.

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

Over time, China will be able to build a strong domestic industry, as it did when it made battery production a national priority, Shi added.

“It resulted in a lot of losses, a lot of failures, but it also created two or three giants that now dominate the global market.”

(Except for the title, this story has not been edited by the NDTV staff and is published from a syndicated channel.)

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