I recently participated in several roadshows for projects related to the automotive electronics and chip industries and learned a lot of information to share with everyone. Over the next 3-5 years, there will be many companies entering the automotive electronics (electrical) market. Here are a few factors contributing to this:
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Rapid increase in electrification penetration: The speed at which electrification rates are increasing, especially in the A00 and B segment markets, has resolved many challenges in the market for mass-producing electric vehicles. The main players in this market are still traditional domestic and new car manufacturers. It’s worth imagining Tesla’s cost-reduction process, shifting from their original North American engineering and procurement team to more efficient local suppliers. This presents a golden opportunity for Chinese automotive electronic suppliers to directly engage with OEM customers that would have previously been difficult to approach, considering that the uncompromising market share of foreign-owned vehicle manufacturers and Tier-1 foreign-owned parts suppliers in the domestic market has been disrupted.
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Shortage of chips (缺芯): This poses a significant impact on the industry and will affect the following:
- First, there will be a natural separation of automotive electronics suppliers. Businesses that cannot establish a reliable chip supply chain may need to shut down as their foremost responsibility would be to maintain supply. Therefore, there is a strong Matthew Effect regarding supplier selection.
- Second, the previous combination of foreign chip manufacturers and foreign Tier-1 suppliers has been disrupted. Until Q3 2021-Q2 2022, their priorities will still be on overseas markets (the effects of disrupted supply chains may persist). The original chip and Tier-1 collaboration mode had a solid priority for developing and collaborating. In this round of separation, the supply strategy of chip companies has slightly changed, adjusting to key customer allocation principles, and to some extent, also counteracting the advantage of large-scale procurement of chips by increasing prices.
- Third and potential impact, which is currently unclear. Since the chip shortage started in Q4 2020, it has intermittently persisted for three quarters, significantly affecting the profitability and production capacity of car makers. Enterprises with weaker profit margins must consider from a strategic perspective whether they can create locally-made chips for comprehensive automotive electronics components, based on similar chips, such as BMS, VCU, and even motor controllers. Even if Tier-1 foreign owned suppliers are willing to help, the process would be slow. If this round of comprehensive localization is successful, it can even foster opportunities for Chinese automotive electronics Tier-1 suppliers, even if it’s only for pure electric A00-A0 level vehicles, allowing them to obtain similar BOM costs to start this operation.
- There is a bigger opportunity around promoting electric vehicles, as the aspects of automotive electronics can be expanded to various other fields.Recently, I had some exchanges with a group of enterprises that intend to develop packs and electric-driven executing systems for heavy engineering machinery products. With the demand for carbon emission reduction and automation, there will be many opportunities for the expansion of China’s automotive electronic control systems in the future. If the existing BMS, VCU and inverter break through the automobile market and find new differentiation opportunities, it will trigger a new situation where volume reduction in automotive electronics can lead to lower prices and bring about high gross profits in various fields.
I really think that in the next 3-5 years, there needs to be an opportunity for Chinese automotive electronic enterprises and the undervalued automotive industry chain to reevaluate their value. I believe my job also needs to do something more meaningful, and I am willing to explore and develop with everyone together.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.