How China became ground zero for auto chip shortage

TAIPEI/SHANGHAI/SINGAPORE, July 19 (Reuters) – From his small office in Singapore, Kelvin Pang, who is poised to take a $23 million salary, says the chip shortage is far from over for automakers – at least in China.

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

He is now looking to sell them to auto suppliers in the Chinese technology hub of Shenzhen for $375 each. He says he turned down offers of $100 each, or $6.2 million for the bundle, which is small enough to fit in the backseat of a car and packed in a warehouse in Hong Kong.

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

The 58-year-old, who declined to say what he paid for the microcontrollers (MCUs), makes a living by trading surplus electronic goods, connecting buyers in China with sellers overseas.

Global chip shortages over the past two years — caused by pandemic supply chaos combined with surging demand — have turned what used to be a high-volume, low-margin trade into the potential for wealth-spinning deals, he says.

Automotive chip order times are long around the world, but Pang and thousands of other brokers like him are focused on China, which has become ground zero for the crisis that is slowly unfolding in other industries.

Globally, new orders are backed up by an average of one year, according to a Reuters survey of 100 automotive chips made by the five leading manufacturers.

To face supply pressure, global automakers such as General Motors Co (GM.N)Ford Motor Co (FN) and Nissan Motor Co (7201.D) It has moved to gain greater access through a playbook that includes negotiating directly with chipmakers, paying more per part and accepting more inventory.

For China, the outlook is bleak, according to interviews with more than 20 people involved in the trade, from automakers, suppliers and brokers to experts at China’s government-affiliated car research firm CATARC.

Despite being the world’s largest carmaker and a leader in electric vehicles (EVs), China relies entirely on chips imported from Europe, the US and Taiwan. Delivery strains have increased due to the zero-covid lockdown of auto hub Shanghai that ended last month.

As a result, the shortage is more severe than elsewhere and threatens to limit the country’s EV momentum, according to China Automotive Technology and Research Center CATARC. It says the growing domestic chipmaking industry is unlikely to be in a position to cope with demand within the next two to three years.

Bong, for his part, sees China’s deficit continuing until 2023, and considers it risky to hold inventories after that. One risk to that view, he says: A sharp economic slowdown could reduce earlier demand.

Forecasts ‘highly unlikely’

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 systems and navigation.

A Reuters survey conducted in June sampled chips made by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas, which perform a wide range of functions in cars.

New orders by distributors have been on hold for an average of 49 weeks – by 2023, according to the analysis, which provides a snapshot of global shortages, though not a regional breakdown. Lead times range from 6 to 198 weeks.

German chipmaker Infineon (IFXGn.DE) It told Reuters it was “heavily investing and expanding manufacturing capabilities around the world,” but said shortages for chips outsourced to foundries would last until 2023.

“As the geopolitical and macroeconomic situation has deteriorated in recent months, reliable estimates of the outcome of the current deficit are no longer possible,” Infineon said in a statement.

Taiwan Chipmaker United Microelectronics Corp (2303.TW) It told Reuters it was able to reallocate some capacity to auto chips due to weak demand in other segments. “Overall, it is still challenging for us to meet the total demand of customers,” the company said.

TrendForce analyst Galen Cheng told Reuters that while auto suppliers need 100 PMIC chips — which regulate the voltage from a battery for an average of 100 applications — they are currently getting only 80.

Searching for chips in a hurry

China’s tight supply conditions contrast with an improving supply outlook for global automakers. Volkswagen, for example, said at the end of June that it expected chip shortages to ease in the second half of the year. read more

William Li, president of Chinese EV maker Neo, said last month that it was difficult to predict which chips would be in short supply. Neo is constantly updating its “at-risk chip list” to avoid any shortages of the more than 1,000 chips needed to run production.

In late May, Chinese EV maker Xpeng Motors (9868.HK) He begged for chips with an online video featuring a sold-out Pokemon toy in China. The bobbing duck-like character waves two signs: “urgent search” and “chips.”

“As the car 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 secure the “cheap chips” needed to build cars.

All roads lead to Shenzhen

Shenzhen, China’s main chip trading hub, and “grey market” automakers and suppliers, according to two people familiar with China’s EV maker’s business, are legally sold but not authorized by the original manufacturer. An automotive supplier.

The gray market carries risks as chips are sometimes recycled, improperly labeled or stored in a damaged condition.

“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 scenario, many chip buyers have to depend on brokers because the authorized supply chain cannot support customers, especially smaller customers in automotive or industrial electronics.”

Pang said many Shenzhen brokers are newbies. “They only know the part number. I ask them: Do you know what this does to the car? They have no idea.”

While it is difficult to quantify the amount held by brokers, analysts say it is not enough to meet demand.

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

While supply stabilizes, analysts and brokers warn there could be an asset bubble in stocks of unsold chips sitting in Shenzhen.

“We can’t hold out much longer, but neither can automakers,” Pang said.

Chinese self-sufficiency

China, which still lags foreign rivals in advanced chip design and manufacturing, is investing to reduce its reliance on foreign chips. But that’s not easy, especially given the stringent requirements for auto-grade chips.

MCUs account for about 30% of a car’s total chip cost, but they are the most difficult category for China to achieve self-sufficiency, said Li Xudong, a senior manager at CATARC, with domestic players entering only at the low end. A market with chips used in air conditioning and seat controls.

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

Chinese EV maker BYD has begun designing and manufacturing IGBT transistor chips, emerging as a domestic alternative, CATARC’s Li said.

“For a long time, China has seen its inability to be completely independent in 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 identifies battery production as a national priority, Shih added.

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

(Fixed removing incorrect reference to average chip order lead time in paragraph 16. Story was previously corrected to correct attribution in paragraph 34 to Li Xudong of CATARC, not William Li of Neo.)

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Reporting by Sarah Wu, Zhang Yan, Kevin Krolicki, Jane Lanhee Lee, Tim Kelly, Chen Lin; Additional reporting by Norihiko Shirozu in Beijing; Editing by Pravin sir

Our Standards: Thomson Reuters Trust Principles.

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