How China became zero for the car chip shortage

How China became zero for the car chip shortage

TAIPEI / SHANGHAI / SINGAPORE, July 19 (Reuters) – From his small office in Singapore, Kelvin Pang is ready to bet on a $ 23 million payday that the worst chip shortage is not facing carmakers – at least in China.

Pang has purchased 62,000 microcontrollers, chips that help control a range of functions from car engines and gearboxes to electric vehicle power systems and charging, which cost the original buyer $ 23.80 each in Germany.

He now wants to sell them to car suppliers at the Chinese technology center Shenzhen for $ 375 each. He says he has turned down offers of $ 100 each, or $ 6.2 million for the entire package, which is small enough to fit in the back seat of a car and is currently packaged at a warehouse in Hong Kong.

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“Car manufacturers must eat,” Pang told Reuters. – We can afford to wait.

The 58-year-old, who refused to say what he himself had paid for the microcontrollers (MCU), makes a living from buying excess electronic stock that would otherwise have been scrapped, and connects buyers in China with sellers abroad.

The global chip shortage over the past two years – caused by pandemic supply chaos combined with booming demand – has transformed what had been a high-volume, low-margin trade into a trade with the potential for wealth-spinning deals, he says.

Ordering times for car chips are still long around the world, but brokers like Pang and thousands like him are focusing on China, which has become the zero point for a crisis that the rest of the industry is gradually moving past.

Globally, new orders are supported with an average of about one year, according to a Reuters survey of 100 car chips produced by the five leading manufacturers.

To counter the supply squeeze, global automakers such as General Motors Co (GM.N), Ford Motor Co (UN) and Nissan Motor Co (7201.T) have moved to ensure better access through a manual that has included negotiating directly with chip manufacturers, pay more per share and accept more inventory.

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

Despite being the world’s largest manufacturer of cars, and a leader in electric vehicles (EVs), China is almost entirely dependent on chips imported from Europe, the United States and Taiwan. Supply loads have been amplified by a zero-COVID barrier at the Shanghai car junction that ended last month.

As a result, the shortage is more acute than elsewhere and threatens to dampen the nation’s EV momentum, according to CATARC, China Automotive Technology and Research Center. A newly started domestic tile manufacturing industry will hardly be able to cope with the demand over the next two to three years, it is said.

Pang, for its part, sees China’s shortages continuing through 2023 and considers it dangerous to keep inventories after that. The one risk for that view, he says: a stronger economic downturn that could push demand earlier.

FORECAST ‘BUTTON POSSIBLE’

Computer chips, or semiconductors, are used in the thousands in all conventional and electric vehicles. They help control everything from airbag deployment and emergency braking automation to entertainment systems and navigation.

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

New orders via distributors are on hold for an average lead time of 49 weeks – well into 2023, according to the analysis, which provides a snapshot of the global shortage, but not a regional collapse. The lead time varies from 6 to 198 weeks.

The German chip manufacturer Infineon (IFXGn.DE) told Reuters that they are “investing and expanding production capacity worldwide strictly”, but said the shortage could last until 2023 for chips outsourced to foundries.

“Since the geopolitical and macroeconomic situation has deteriorated in recent months, reliable assessments regarding the end of the current shortage are unlikely to be possible right now,” Infineon said in a statement.

Taiwanese chipmaker United Microelectronics Corp (2303.TW) told Reuters that they have been able to redistribute some capacity to car chips due to weaker demand in other segments. “On the whole, it remains challenging for us to meet the total demand from customers,” the company said.

TrendForce analyst Galen Tseng told Reuters that if car suppliers needed 100 PMIC chips – which regulate the voltage from the battery to more than 100 applications in an average car – they currently only got around 80.

URGENT SEEKING CHIPS

The tight supply conditions in China are in contrast to the improved supply prospects for global car manufacturers. Volkswagen, for example, said at the end of June that they expected the chip shortage to decrease in the second half of the year. read more

The chairman of the board of the Chinese electric car manufacturer Nio, William Li, said last month that it was difficult to predict which pieces would be in short supply. Nine regularly updates its “risky chip list” to avoid a shortage of any of the more than 1,000 chips needed to run production.

At the end of May, the Chinese electric car manufacturer Xpeng Motors (9868.HK) asked for chips with an online video with a Pokémon toy that was also sold out in China. The bouncing duck-like character waves with two characters: “seeking urgency” and “chips”.

“As the car supply chain gradually recovers, this video captures the current state of the supply chain team,” Xpeng CEO He Xiaopeng wrote on Weibo, saying his company struggled to secure “cheap chips” needed to build cars.

ALL ROADS BEFORE SHENZHEN

The battle for solutions has led carmakers and suppliers to China’s main chip trading hub in Shenzhen and the “gray market”, brokering supplies that are legally sold but not authorized by the original manufacturer, according to two people familiar with the trade at a Chinese electric carmaker and a beetle supplier.

The gray market carries a risk because chips are sometimes recycled, incorrectly marked or stored under conditions that damage them.

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

Pang said many Shenzhen brokers were newcomers who were drawn by the rise in prices, but unfamiliar with the technology they bought and sold. “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.

“Not all chips are hidden somewhere, and you just need to bring them to market,” said Ondrej Burkacky, McKinsey’s senior partner.

When supply normalizes, there may be an asset bubble in the stocks of unsold chips in Shenzhen, analysts and brokers warned.

“We can not hold on for too long, but the car manufacturers can not hold on either,” Pang said.

CHINESE SELF-EXPRESSION

China, where advanced chip design and manufacturing still lags behind foreign rivals, is investing to reduce its reliance on foreign chips. But it will not be easy, especially given the strict requirements of auto-grade chips.

MCUs make up about 30% of the total chip cost of a car, but they are also the most difficult category for China to achieve self-sufficiency in, said Li Xudong, senior manager at CATARC, adding that domestic players had only entered the lower the end. of the market with chips used in air conditioners and seat controls.

“I do not think the problem can be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We are dependent on other countries, with 95% of the wafers imported.”

The Chinese electric car manufacturer BYD, which has started designing and producing IGBT transistor chips, is emerging as a domestic alternative, said CATARC’s Li.

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

In time, China was able to build a strong domestic industry as it did when it identified battery production as a national priority, Shih added.

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

(Corrects to delete incorrect reference to average chip order lead time in section 16. History was previously corrected to fix attribution in section 34 to CATARCs Li Xudong, not Nios William Li.)

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

Our standards: Thomson Reuters Trust Principles.

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