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How China became ground zero for car chip shortage

How China became ground zero for car chip shortage

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

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

He’s now looking to sell it to auto suppliers at Shenzhen’s China Technology Center for $375 apiece. He says he 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 now packed in a warehouse in Hong Kong.

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“The automakers have to eat,” Pang told Reuters. “We can wait.”

The 58-year-old, who declined to say what he himself paid for his microcontroller units (MCUs), is earning a stockpile of excess electronics that would otherwise be scrapped, connecting buyers in China with sellers abroad.

He says the global chip shortage over the past two years – caused by pandemic supply chaos combined with rising demand – has transformed what used to be a high-volume, low-margin trade into one with the potential for wealth-spinning deals.

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

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

To meet supply pressure, global automakers such as General Motors (GM.N)Ford Motor Company (FN) and Nissan Motor Co (7201.T) It moved to secure better access through the rules of the game that included negotiating directly with chip makers, paying more per part and accepting more inventory.

But 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 the Chinese government’s Automotive Research Institute CATARC.

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

As a result, the shortage is more severe than elsewhere and threatens to dampen the country’s electric vehicle momentum, according to CATARC, the Chinese automobile research and technology center. It says it is unlikely that the nascent domestic chip industry will be in a position to handle demand in the next two to three years.

For his part, Pang sees the continuation of the shortage in China until 2023 and sees it as dangerous to keep stocks after that. The only danger to this view, he adds, is: a sharp economic slowdown that could cut demand earlier.

Expectations are ‘difficult to happen’

Computer chips, or semiconductors, are used by the thousands in every conventional and electric vehicle. It helps control everything from airbag deployment and emergency braking automation to entertainment and navigation systems.

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A Reuters poll in June took a sample of chips made by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas, which perform a variety of functions in automobiles.

New orders across distributors are pending for an average lead time of 49 weeks — until 2023, according to the analysis, which provides a snapshot of global shortages albeit not a regional breakdown. The lead time ranges from 6 to 198 weeks.

German chip maker Infineon (IFXGn.DE) She told Reuters she was “investing aggressively and expanding manufacturing capabilities around the world” but said the shortages could last until 2023 for the chips outsourced to foundries.

“Since the geopolitical and macroeconomic situation has deteriorated in recent months, reliable assessments on ending the current shortage are not currently possible,” Infineon said in a statement.

Taiwanese chip manufacturer United Microelectronics Corp (2303.TW) It told Reuters it was able to reallocate some capacity to auto chips due to weak demand in other sectors. “On the whole, it is still difficult for us to meet aggregate demand from customers,” the company said.

TrendForce analyst Galen Tseng told Reuters that if car suppliers needed 100 PMICs — which regulate voltage from the battery to more than 100 applications in a typical car — they currently only get about 80.

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Limited supply conditions in China contrast with improved supply expectations for global automakers. Volkswagen, for example, said in late June that it expected the chip shortage to recede in the second half of the year. Read more

The chairman of Chinese electric car maker Nio, William Lee, said last month that it was difficult to predict which chips would be in short supply. Nio regularly updates its Dangerous Slides List to avoid shortages of any of the more than 1,000 chips required to run production.

In late May, Chinese electric car maker Xpeng Motors (9868.HK) Ordering chips through an online video showing a game Pokémon that was also sold in China. The swaying duck-like character waves two signs: “Urgent Seeking” and “Chips”.

“While the automotive supply chain is gradually recovering, this video captures the current state of our supply chain team,” Xpeng CEO He Xiaopeng said on Weibo, saying his company had been struggling to secure “cheap chips” essential to building cars.

All roads lead to Shenzhen

The scramble for alternative solutions has led automakers and suppliers to China’s main chip trading hub in Shenzhen and a “grey market,” where supplies were sold legal but not authorized by the original manufacturer, according to two people familiar with the trade at the company. Chinese electric car manufacturer and auto supplier.

The gray market has risks because the chips are sometimes recycled, incorrectly labeled, or stored in conditions that lead to spoilage.

“Brokers are very risky,” said Masatson Yamagi, director of research at Gartner, adding that their rates are 10 to 20 times higher. “But in the current situation, many chip buyers need to rely on intermediaries because the certified supply chain cannot support customers, especially small customers in the field of automobiles or industrial electronics.”

Pang said that many Shenzhen brokers are newcomers who were attracted by the steep price hike but were unfamiliar with the technology they were buying and selling. “They only know the part number. I ask them: ‘Do you know what this does to the car?’ They have no idea.”

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

“It’s not like all the chips are hidden somewhere and just need to be brought to market,” said Ondrej Burkacky, Senior Partner at McKinsey.

Analysts and brokers have warned that when supply returns to normal, there may be an asset bubble in unsold chip stocks in Shenzhen.

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

Chinese self-efficacy

China, where advanced chip design and manufacturing still lags behind competitors abroad, is investing to reduce its dependence on foreign chips. But this will not be easy, especially given the stringent requirements of auto-grading chips.

The MCU makes up about 30% of the car’s total chip costs, but it is also the hardest category for China to achieve self-sufficiency in, said Li Xudong, senior manager at CATARC, adding that domestic players only entered the bottom line. from the market with chips used in air conditioning controls and seats.

“I don’t think the problem can be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We depend on other countries where 95% of the chips are imported,” he added.

Li of CATARC, said Chinese electric vehicle maker BYD, which began designing and manufacturing IGBT transistor chips, is emerging as a domestic alternative.

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

Over time, Xie added, China could build a strong domestic industry as it did when it identified battery production as a national priority.

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

(Corrections to delete incorrect reference to average chip order lead time in paragraph 16. The story was previously corrected to fix attribution in paragraph 34 to Li Xudong of CATARC, not to William Li of Nio.)

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Additional reporting by Sarah Wu, Zhang Yan, Kevin Krulicki, Jane Lanhe Li, Tim Kelly, Chen Lin; Additional reporting by Norihiko Shirozu in Beijing. Edited by Praveen Shar

Our criteria: Thomson Reuters Trust Principles.