Two-pronged plan targets short-term shortages and long-term lead in smart vehicles

 

Carmakers' production has slipped into low gear as crimped supplies have made semiconductors, which are now integral to new-age vehicles, a precious commodity, company executives and experts said.

 

As the world's largest auto market and production base, China's response to the shortages has been to ramp up efforts to develop its indigenous semiconductor sector.

 

At the same time, the nation has been deepening international cooperation for vehicle chips, they said.

 

Such efforts are meant not just to solve the short-term challenge of stepping up supplies of auto chips, but to help the nation establish a sound semiconductor foundation for achieving its goal of building a globally competitive smart vehicle sector over the next decade and beyond, they said.

 

Dong Yang, co-chairman of the China Automotive Chip Industry Innovation Strategic Alliance, an organization founded in September 2020 to promote the development of China's homegrown auto semiconductor sector, said auto chip shortages became evident amid the COVID-19 pandemic.

 

The problem emerged in China in late December as a result of the unexpected recovery in the local auto market. The revived global demand for chips used in consumer electronics such as personal computers and smartphones is also affecting the production of chips used in cars, Dong said.

 

"Currently, China relies heavily on import of crucial auto chips. Though China accounts for more than 30 percent of global sales of cars, the nation produces only about 5 percent of the global auto chips," Dong said.

 

According to him, it is important to cultivate competitive Chinese auto chipmakers that can help local companies better deal with crises such as the COVID-19-related shortages and possible export restrictions imposed by other countries amid geopolitical uncertainties.

 

"But it does not mean that we would sever our ties with the global auto chip supply chain. Instead, we are just striving for a healthier proportion so that we can rely on ourselves whenever an emergency arises. We will continue expanding international cooperation, given that chips and cars are both highly globalized industries," Dong said.

 

Consulting firm AlixPartners estimates the current chip shortage woes will likely cost the global auto industry $60.6 billion in revenue this year.

 

Many Chinese carmakers, including new energy vehicle maker Nio, have announced plans to cut production of some models. And some of them are working to prioritize the assembly of higher-margin models by cutting back on low-profit ones.

 

For their part, a string of semiconductor giants intensified efforts to expand their production capacity. But it will take time to build new factories and experts expect the chip pain to persist for some time to come.

 

Li Shaohua, deputy secretary-general of the China Association of Automobile Manufacturers, said the country's domestic automakers cut their production by 5 to 8 percent in January and February this year due to the chip shortage.

 

"The global chip shortage is hitting many industries, not only automobiles but fields like consumer electronics, communication systems and medical equipment. At the same time, the imbalance between supply and demand has caused a sharp rise in the prices of various chips," Li said.

 

A senior executive from a Chinese carmaker, who sought anonymity, said certain auto chips, whose price was 70 yuan ($10.7) apiece before the COVID-19 pandemic, are now as expensive as 2,000 yuan each.

 

Worse, though many carmakers are cash-flush and can afford the costlier chips, they still cannot buy the products immediately, for the waiting list is too long and the supplies are too tight.

 

Li from the China Association of Automobile Manufacturers predicted at March-end that the supply shortages will continue over the next six or even nine months.

 

The demand-supply balance may be restored around the third quarter of this year, he said.

 

Not surprisingly, the Ministry of Industry and Information Technology, China's top industry regulator, has been nimble in its efforts to mitigate the woes. It is working to improve communication between local automobile makers and semiconductor companies, to better match supply and demand.

 

Qiao Yueshan, head of the electronic information department at the Ministry of Industry and Information Technology, said in March that semiconductors are the cornerstone of the information society, and a driving force behind the automobile sector.

 

To promote communication between local automakers and semiconductor companies, the ministry has guided the parties concerned to compile a brochure with focus on building a new online communication platform to better match supply and demand.

 

According to Qiao, in recent years, domestic companies have produced a string of high-quality semiconductor products for the auto industry, thanks to the support of local carmakers.

 

"But generally speaking, the domestic semiconductor sector does not have enough understanding of car companies' demands; nor do they have enough experience in bringing their products to the market," Qiao said.

 

Huang Jipo, chairman of Sine Microelectronics, a Chinese auto chipmaker, said carmakers have stringent standards to ensure the reliability and stability of automobile chips. That is why, they tend to prefer chips made by established foreign giants.

 

Emerging Chinese auto chipmakers have a stiff challenge on their hands－that of gaining the confidence of the auto industry against all odds, he said.

 

"But as Chinese companies beef up research and development capabilities, they will have the potential to enter the mainstream supply chain of automakers."

 

Progress in that direction has been made already. In March, Chinese automobile maker SAIC Motor Corp Ltd said it has joined hands with smart chip company Horizon Robotics to further expand in the automobile chip arena.

 

Yang Xiaodong, vice-president of SAIC Motor and general manager of the company's passenger vehicle branch, said chips are one of the key areas for smartening the automotive industry, and Horizon Robotics is one of the few companies that boasts capabilities in smart chip manufacturing, vision perception algorithms as well as data technology.

 

Horizon Robotics' partners among mainstream automakers include Changan Auto and Great Wall Motors.

 

The current chip shortage also has a silver lining: it could lead to the greater development and strengthening of China's domestic chip industry, providing the country with a more secure supply chain in the future.

 

That will be crucial to the healthy long-term development of China's automotive industry, which is increasingly embracing electric vehicles that are connected and "intelligent".

 

Thomas Manfred Muller, executive vice-president of Volkswagen Group China, earlier said at a semiconductor forum that in the future, there will be around 6,000-10,000 chips in a car, and 80 percent of the innovations in the automotive industry will be based on semiconductors.

 

Dong from the China Automotive Chip Industry Innovation Strategic Alliance said China now has capabilities to overcome the problem of insufficient domestic production of auto chips.

 

"Auto chips do not require the highest-end manufacturing technology. For instance, most car chips are made with 28 to 40 nanometer manufacturing process, which Chinese chipmakers are capable of. There is no high threshold for the design capabilities, production conditions and manufacturing equipment of chips," Dong said.

 

"The main difficulty lies in the high requirements for reliability, durability for bad weather, consistency and functional safety. China only lacks an ecosystem for the design, production and application of automotive chips. This is where we must excel in."

 

According to him, China has the world's largest market for both automobile production and sales. The country's production volume accounts for about one-third of the world's, and it may account for half of the world's output in the future. Such a large market can support the development of key semiconductor materials, core components and high-end equipment.

 

"More importantly, Chinese carmakers are now more willing to partner with domestic auto chipmakers, which will help usher in a golden development stage for the indigenous auto chip sector."