"Core" of cars driving in Shanghai

Author: Zhang Jin

In 2021, the global automotive market is facing a major crisis. The problem lies in chips – car manufacturers cannot produce cars if they cannot purchase chips, and the market has no cars to sell.

Liang Jing works in a traditional car manufacturing company. Their company has always purchased chips from a chip factory in the Philippines. However, after the outbreak of the pandemic in that region, many workers in the factory died, causing forced shutdowns, and leading to production shutdowns for Liang Jing’s car manufacturing company.

Since 2019, the chip shortage has been building up in various industries such as consumer electronics, and reached the automotive industry in Q4 2020. News of production shutdowns and stoppages has been widespread, and the industry is in a state of despair.

The chip shortage is affecting every industry, but none more seriously than the automotive industry. This has led to a crisis of car chips on a global scale. There are many reasons for this, such as underestimation of the demand for automotive chips, competition with consumer electronics, shortage of supply due to tight global production capacity of 8-inch wafers, and a series of accidents and disasters this year have worsened the chip shortage.

In this chip shortage crisis, domestic chip manufacturers have lost their “name”.

For cars, chips are the “brain” that enable all functions to operate. A car requires 500-600 chips, and as cars become more electronic, it is expected that the average number of chips required per vehicle will exceed 1000 in 2021. Without chips, cars cannot operate. Foreign automotive chip manufacturers relying on the absolute advantage established in the traditional MCU chip field still dominate the automotive chip market. According to public data, Infineon, NXP, Renesas, Texas Instruments (TI), and STMicroelectronics are the top five suppliers of car chips in the world, occupying about 50% of the global automotive chip market.

According to the data released by the General Administration of Customs of China, the import volume of chips in China reached 305.55 billion U.S. dollars in 2019, while the export volume was 101.58 billion U.S. dollars. The trade deficit in chips has been a long-term problem for China. According to McKinsey’s report, most technology-related enterprises in China are still operating in the domestic market. More than 50% of the primary suppliers of electronic components are located in China, except for the semiconductor field, where only 5% of the primary chip suppliers are in China.

According to the Semiconductor Industry Association of China Design Branch, the number of domestic chip design enterprises reached 2218 in 2020, an increase of 24.6% from 1780 in 2019. The majority of these enterprises are located in Beijing, Shanghai, and Shenzhen.

Shanghai is getting harder

Most of the giant companies that have risen in China over the past 20 years have chosen to establish themselves in first-tier cities. Baidu, ByteDance, JD.com, and Xiaomi are in Beijing; Tencent, Huawei, ZTE, and DJI are in Shenzhen; and NetEase, UC Browser, Joy Entertainment, Vipshop, and Xpeng Motors are in Guangzhou.When it comes to Shanghai, exquisite and petit-bourgeois lifestyle has become the yearning beyond the magic city for young people. Only in recent years have some emerging Internet companies settled in, such as Pinduoduo, Ctrip, and Bilibili.

It can be said that Shanghai has always been running along with the development of science and technology in China. With the popularity of chips, people have found that petit-bourgeois and hard technology are connected. Many leading chip companies are located here.

Due to the developed transportation, the Yangtze River Delta has become one of the origins of China’s semiconductor industry, dating back to the 1960s. It has now become one of the few city clusters in the country with a complete semiconductor industry chain. Shanghai, Wuxi, and Suzhou are its representatives.

Among them, Shanghai is known as the starting point of the “chip corridor” and has already gathered more than 700 semiconductor companies. Last year, the sales scale of Shanghai’s integrated circuit industry exceeded RMB 200 billion. This number is expected to increase to RMB 244 billion this year.

Up to now, there are 11 domestic semiconductor companies with a market value of over RMB 100 billion, and four of them are registered in Shanghai, namely, SMIC, VeriSilicon, Hua Hong Semiconductor, and JCET. Beijing has Naura Microelectronics and ESMT, and the rest are scattered in cities such as Wuxi, Fujian, and Tianjin.

The semiconductor company where Yang Tian is employed is located in this city, mainly engaged in the production of chips for consumer electronics and vehicles.

In his opinion, the gathering of chip companies in Shanghai is like the formation of a “business district”. In the past, some major companies in the industry chose to settle in Shanghai, and other chip companies followed in the footsteps of the industry leaders and entered Shanghai. “In this circle of Shanghai’s chip industry, it is convenient for companies to exchange technologies and share resources, and promote common development. When others talk about China’s semiconductor industry, they will think of Shanghai’s semiconductor industry.”

When the development of Internet industries such as e-commerce and short videos enters the mature stage, hard technology such as AI, chips, and VR become the trend, Shanghai begins to radiate its “magic” in hard technology fields such as chips.

In 1985, the first 64K DRAM was successfully trial-produced at the state-owned 742 Factory in Wuxi, and “Chinese chips” have been pulsating for more than three decades. Today, the shortage of chips in the automotive industry has erupted and is seen as an opportunity for domestic chips.

For domestic automakers, this is not just the overlapping of an industry misjudgment and a sudden event. It is also a warning. Leading automakers such as SAIC, Ford, NIO, and XPeng have all realized the impact of chip shortages on production capacity. Once the foreign supply is cut off, domestic automakers can only wait. Behind this is the reef exposed by the shortage of chips in domestic automobile companies—they have relied too heavily on foreign chips.In this crisis, the semiconductor company where Yang Tian works has seen a surge in chip orders, and chip prices have been rising by 30-40% each year since 2019. “However, even with the orders, there are not many companies that can handle them. They don’t have the strength for it.” For domestic chip manufacturers, this is both an opportunity and an infinite challenge.

Looking ahead, in the “Chinese Silicon Valley” competition held in Beijing and Shenzhen for many years, Shanghai relies on the development of the chip industry with the hope of gaining nomination rights.

The chip trend is entering the automotive industry

After the shortage of chips crisis broke out in the automotive industry, Gong Qiang’s company’s strategy changed, “In the field of automotive chips, we used to only produce mid-to-low-end chips such as sensors and storage. Now, the management sees that automotive chips will inevitably become the trend of the industry in the future and has already increased investment in automotive chips.”

Two months ago, his semiconductor company was busy applying for certification in the chip field, and only after passing could they have the qualification to mass-produce that type of chip.

It is reported that in the first half of 2021, there were 18,800 new domestic chip-related companies, a year-on-year increase of 171.8%.

As automotive chips begin to gain momentum, many domestic chip companies are also turning to this field, eager to be the first ones to take a slice of the cake. But this cake is hard and difficult to chew.

Another Shanghai chip manufacturer, Birui Technology, announced that it is entering the field of autonomous driving chips in November of this year, at the same time as the outbreak of the crisis in the automotive chip industry. Autonomous driving chips are known as the “Mount Everest” of chips, representing the highest technological challenge.

Most domestic car companies have always chosen to purchase chips from overseas. With the chip crisis this time, changes started to happen. According to an employee from a domestic chip manufacturer, “Since 2020, some car models have been looking for more stable domestic chip manufacturers, but after practical evaluation, there are few that meet the criteria.” The employee also said, “Several car companies have come to our company looking for alternative IGBT chips, but they all leave disappointed in the end, because our manufacturing process still lags significantly behind foreign ones.”

Due to concerns about personal safety, automakers have stricter requirements for automotive chips. When the crisis occurred, domestic chip manufacturers remained silent as a group. Facing the crisis in the automotive industry, we cannot currently rely on ourselves and have “no domestic products” to fill the gap, which is very passive.

In terms of technical implementation difficulty, automotive chips can be divided into three tiers: the first tier is high-performance, high-tech chips, which fall under the highest technological gradient and are typically represented by various AI and control chips. With the development of intelligent connected cars, the demand for these types of chips will continue to increase; the second tier is MCU microcontrollers, which are the most commonly used in cars, and are currently the most lacking; the third tier includes power chips, communication chips, sensors and actuators, storage chips, and other low-calculation power and low-tech requirement chips.Each tier is separated by “a wall”, and various vehicle-level certifications are the manifestation of this wall. To enter the field of vehicles and enter the supply chains of Tier 1 car companies to produce core automotive chip products, first, various vehicle-level certifications for automotive chips must be obtained. This is the entry pass, such as a series of AEC-Q specifications including AEC-Q100. Currently, there are not many semiconductor companies in China that can obtain relevant certifications.

At the same time, China’s automotive chip testing and certification system is not yet perfect, and relevant industry standards are missing, lagging behind the foreign chip industry by nearly a decade.

“In the field of automotive chips, it is already possible to achieve domestic substitution for mid-to-low-end products, but it is currently difficult for high-end and core products.” The order volume for the chip factory where Yang Tian worked has skyrocketed, multiple times higher than the previous two years, but factory efficiency is difficult to improve, and the orders produced in November are still from February or March of this year.

From wafer manufacturing to packaging testing, this domestic chip manufacturer can handle the entire process, but can only produce some low-end automotive chips.

“Many customers have told us that not only in the automotive industry but the entire industry is facing a shortage of chips. Most domestic automotive chip manufacturers can only complete one part of the process, such as packaging or testing, and cannot complete the critical links such as wafer manufacturing and design.”

“From what I understand, several local companies in the industry are also transforming into automotive chips, but it is destined to be difficult. Our company cannot even pass the certification of many core chip-level certifications, so we can only do some third-tier auxiliary parts, and we can’t make high-end automotive chips.” Yang Tian shared with Photon Planet.

Currently, there are many domestic automotive chip manufacturers, but not many have mastered core technologies, mainly including mass production of MCU microcontrollers and autonomous driving chips. Domestic chip testing scenarios are currently limited to car windows, keys, or air conditioners, which are not closely related to personal safety. “At most, if an error occurs, it will lead to a short circuit fault, but it will not cause any traffic accidents or pose any risks to personal safety,” one industry professional said.

Automotive chips are different from other chips and emphasize safety and stability, so high process requirements are necessary, with strict vehicle-level certifications.

To obtain vehicle-level certifications, many domestic chip manufacturers’ processes do not meet the standards, and the main focus of process issues is on wafer manufacturing and design. From mobile phones to cars, the core technology, often referred to as being the “neck” of the industry, is mainly the wafer manufacturing and design, which are in the hands of other companies. In the manufacturing process, almost all high-performance automotive chips are fabricated by TSMC and Samsung. From the perspective of chip design, IC design and innovation are still mainly based in the United States.According to the revenue rankings of the top ten global semiconductor design companies released by market research firm TrendForce in Q1 of 2021, there are three companies from Taiwan, including MediaTek, Unigroup Guoxin, and Realtek Semiconductor. Huawei’s Hisilicon company used to be among the top ten semiconductor design companies globally, but its revenue declined significantly after being hit by sanctions.

The production process of a chip includes design, wafer manufacturing, packaging, and testing. Since 1987, the chip industry has been highly segmented globally, with Europe and the United States dominating the upstream segment, such as design, and East Asia focusing on the downstream segment, such as manufacturing and packaging. Only in the packaging segment, Taiwan and Mainland China occupy a leading position.

Overall, the United States, Japan, Europe, and Taiwan have formed a complete coverage of the core industry in the upper and middle reaches, monopolizing the semiconductor industry with self-controlled technology.

“Achieving breakthroughs between the tiers of the chip industry requires upgrading the entire industry chain of chip manufacturing,” said a senior industry insider.

As automotive companies enter the market, semiconductor manufacturers no longer need to operate alone.

“Compared with foreign products, domestic chips were at least ten years behind in core technology,” said chip engineer Xu Wen, who attended some semiconductor technology exhibitions in Shenzhen and Shanghai. “The difference is significant. When foreign products were shown, it was really eye-opening and quite shocking, and we are unlikely to catch up in the short term.”

“There are not many companies in China that really focus on core technology. Most of them focus on packaging and testing, and there are some so-called ‘second-hand dealers’ who buy products and sell them under their own brand,” said a chip agent.

Before the shortage of chips, Zhang Lu’s domestic chip customers were few, with only three to five sales lines in the company’s sales revenue, accounting for a small portion of the revenue.

After the supply shortage, European and American chip manufacturers began to impose restrictions on domestic supplies in some policies, and the shortage of chips became more and more severe, and downstream companies began to feel the crisis. “Some state-owned enterprises and large companies, such as Hisense, have come up with a set of plans. Should they develop their own chips and how to do it?”

The government also offers incentives for companies planning to develop their own chips, which Zhang believes is an opportunity for domestic chip manufacturers. It depends on who can survive.

This industry requires a large amount of sustained technological innovation and capital investment, and it is also a field with a large investment and long return cycle. Many companies cannot survive until listing day because their funding chains break, and news of chip companies going bankrupt has been pouring in since the chip wind blew into China in 2019, and many start-up chip companies emerged. Therefore, domestic substitution is an extremely difficult long-term project that cannot be completed in one or two years. With the trend of automotive electrification and intelligence, even if the epidemic recovers, it will be difficult to reverse the shortage of chips in the short term, and the shortage will continue.Based on the impact caused by chip shortage, various automobile companies have had to seek partners or chip suppliers domestically. “Since 2019, many of our automobile clients, both foreign and domestic, have started to explore opportunities and initiate tests for any chip that can be used,” says a practitioner.

Chery Automobile, a long-term client of Xu Wei’s company, has historically purchased more low-voltage MOSFET and Diode devices with low-voltage high current, with core chips all sourced from foreign manufacturers. “However, after this crisis, they began to use our products for high-voltage high current devices.”

“Choosing domestic chips is partly due to price, as well as the desire for good products and a belief in domestic chips,” Xu Wei believes that many automotive companies are thinking that in the future, in order to steadily develop in the domestic market, gradually replacing foreign products, they need to find suitable chip suppliers domestically.

Regarding the development of domestic chips, the strategy is to start with low- to mid-end chips, such as MOSFET and accumulate experience to produce high-end core chips. “Once the quantity is reached, the production cost of domestic chips will definitely be lower than that of foreign ones. The cost of a single chip is very high, and it needs to reach a certain level of quantity to dilute the cost.”

Domestic chips are gradually breaking through, starting from lower-end chips such as car windows, then to core chips. To introduce a customer and gain their trust, we need to try out new products from edge chips to core chips. “By doing well in edge chips, stability and safety requirements can be met, and there will be more opportunities to use our higher-end chips,” believes a chip supplier. “To form a progressive cooperative relationship, the cost of our chips will be cheaper than foreign ones, and the stability will be good. Automotive companies will gradually turn to domestic enterprises.”

“This is indeed a good opportunity for domestic chip manufacturers. Some domestic chip foundries have emerged, including silicon carbide projects focused on new energy, with the top three in the industry being Infineon, STMicroelectronics, and CRRC Zhuzhou. A rail transit solution developed with Huawei has been successful, and some car manufacturers have verified their solutions,” says a chip practitioner to Photon Planet.

Unlike other industrial or consumer products, domestically produced vehicle chips are still in the crawling stage. In the past, if there were problems, the chip industry would digest it themselves. But now, the role of automakers in the chip supply chain has been amplified. According to Wind data, currently, the self-research rate of chips used in domestic vehicles accounts for only 10%, with 90% of them dependent on imports, but the domestic automotive market accounts for one-third of the global market. After experiencing this crisis, the various automakers have begun to rethink their position in the entire industry chain and to seek self-help.Yang Tian’s chip company is preparing to go public next year, with only two of the seven or eight investors from the previous round coming from the automotive industry, while the remaining investors are all upstream customers, including material suppliers and other chip companies. During the current crisis, several automotive companies are in talks about investing in the company because “they think our chips are pretty good domestically and have development potential”.

In addition, car manufacturers such as NIO and SAIC from Shanghai are gradually participating in the chip industry chain by investing in it.

With the participation of car manufacturers, national chip manufacturers have a turning point because of increased funding, talent and technological investment, making it possible to change the predicament of chip manufacturers struggling alone.

At the same time, each car manufacturer hopes to have its own chip manufacturing factory, but through practice, it has become evident that the entire process is difficult. Previously, Yang Tian’s clients among car manufacturers also attempted to produce their own chips but found out that producing a chip was much more challenging than they had imagined. Chery is one example where “at least half a year or a year is required to officially apply, even after completing the verification process. It can be done but it won’t be that fast – it takes time to refine the process.”

Meanwhile, an industry insider stated, “one car requires thousands of chips. Even if you submit an application for the desired components, the cost will not be low. Car manufacturers consider self-research on core components, but if the research doesn’t reach a certain level, the research and development costs will be quite substantial.”

In the future, as the automobile industry continues to develop, more and more car companies will join the sequence of building their own chip factories so that they can control the core chips.

The cooperation between chip manufacturers and automakers will become increasingly close. Currently, Shanghai has the most automotive companies in China, including NIO, SAIC, WEY and GAC, which are headquartered here; companies such as Xiaomi and Ideal [vehicles] have also set up offices in Shanghai, and it is also the location of many multinational companies’ China headquarters, such as Tesla, Ford, and Volvo.

More and more car manufacturers are looking to Shanghai, stepping into the “chip corridor” and jointly building the automotive semiconductor field. This magic city, which accompanies China’s technology development every year, will also begin to show its “magic” to the world.

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.