Auto chip shortages: How China became Ground Zero for shortages amid pandemic, more

From his small office in Singapore, Kelvin Pang is willing to bet $23 million (roughly Rs. 184 crore) that the worst of the chip shortage is not over for automakers—at least in China. Pang has 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 original buyer $23.80 (roughly Rs. 1,900) each in Germany .

Now he wants to sell them to car suppliers in China’s tech hub Shenzhen for $375 (roughly Rs. 30,000) a piece. He says he turned down offers of $100 (roughly Rs. 8,000) each or $6.2 million (roughly Rs. 50 crore) for the entire package, which is small enough to fit in the backseat of a car and is packaged for currently in stock in Hong Kong.

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

The 58-year-old, who declined to say what he paid for the microcontrollers (MCUs) himself, makes his living trading surplus electronics that would otherwise be scrapped, connecting buyers in China with sellers overseas.

Global chip shortages over the past two years – caused by pandemic supply chaos combined with booming demand – have turned what was a high-volume, low-margin trade into one with the potential for fortune-spinning deals, he says.

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

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

To counter shrinking supply, global automakers such as General Motors Co, Ford Motor Co and Nissan Motor Co have moved to provide better access through a playbook that includes negotiating directly with chipmakers, paying more for a part and accepting more 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 China’s government-linked automotive research institute CATARC.

Despite being the world’s largest automaker and a leader in electric vehicles (EVs), China relies almost entirely on chips imported from Europe, the United States and Taiwan. Supply tensions have been compounded by the zero-spread COVID-19 lockdown in auto hub Shanghai, which ended last month.

As a result, the shortage is more acute than elsewhere and threatens to limit EV momentum in the nation, according to CATARC, the China Automotive Technology and Research Center. The fledgling domestic chip manufacturing industry is unlikely to be able to keep up with demand in the next two to three years, it said.

Pang, for his part, sees China’s shortages continuing until 2023 and thinks it’s dangerous to hold onto stocks beyond that. The only risk to that view, he says: a sharper economic slowdown that could dampen demand sooner.

PREDICTIONS “Hardly Possible”

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

The Reuters survey, conducted in June, sampled chips made by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas that perform a variety of functions in cars.

New orders through distributors have been held back for an average lead time of 49 weeks – deep into 2023, according to the analysis, which provides a snapshot of global shortages but no regional breakdown. Lead times ranged from 6 to 198 weeks, with an average of 52 weeks.

German chipmaker Infineon told Reuters it was “investing intensively and expanding its production capacity globally” but said shortages could last until 2023 for chips outsourced to foundries.

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

Taiwanese chipmaker United Microelectronics Corp told Reuters it had been able to shift some capacity to automotive chips due to weaker demand in other segments. “Overall, it is still challenging for us to meet aggregate customer demand,” the company said.

TrendForce analyst Galen Tseng told Reuters that if car suppliers needed 100 PMIC chips – which regulate battery voltage for more than 100 applications in an average car – they currently only get about 80.

URGENTLY LOOKING FOR CHIPS

Tough supply conditions in China contrast with an improved supply outlook for global automakers. Volkswagen, for example, said in late June that it expected chip shortages to ease in the second half of the year.

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

In late May, Chinese electric car maker Xpeng Motors solicited chips with an online video featuring a Pokemon toy that also sold out in China. The hopping duck-like character waves two signs: “urgent wanted” and “chips”.

“As the automotive supply chain gradually recovers, this video captures the current state of our supply chain team,” Xpeng CEO He Xiaopeng posted on Weibo, saying his company was struggling to provide “low-cost chips “, necessary for the production of cars.

ALL ROADS LEAD TO SHENZHEN

The scramble for workarounds has led automakers and suppliers to China’s main chip trading hub, Shenzhen, and the “gray market,” intermediary supplies sold legally but not authorized by the original manufacturer, according to two people familiar with the Chinese electric car maker’s trading and car supplier.

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

“Brokers are very dangerous,” said Masatsune Yamaji, research director at Gartner, adding that their prices are 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 customers in automotive or industrial electronics.”

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

While the volume held by brokers is difficult to quantify, analysts say it is far from enough to meet demand.

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

When supplies normalize, there could be an asset bubble in Shenzhen’s unsold chip stocks, analysts and brokers warn.

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

CHINESE SELF-SUFFICIENCY

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

MCUs account for about 30 percent of total automotive chip spending, but they are also the most difficult category for China to achieve self-sufficiency, Nio’s Li said, adding that domestic players have only penetrated the lower end of the air-conditioning chip market and seat controls.

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

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

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

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

“It led to a lot of waste, a lot of failure, but then it also led to two or three giants that now dominate the world market.”

© Thomson Reuters 2022