This article is authorized to be reprinted from Chuxing Yike (WeChat official account ID: carcaijing) and created by the Transportation Industry Group of “Economic Observer” magazine, written by Jingyi Wang, Yang Li, Yang Zhang and Maomao Qu, edited by Zhiliang Shi.
The shortage of chips is dynamic. We don’t know what kind of chips we will need tomorrow. However, industry panic is not as big as imagined. Under the expansion of production, experts even warned of the worries of oversupply.
It has become a reality for manufacturers to not produce cars and for dealers to not have cars to sell to some extent.
“Because of the shortage of chips, if you choose to add a high-configured heating rod and a Harman Kardon speaker to ID.4 (the new electric car launched by Volkswagen), the delivery will only be available in September. If you choose a regular configuration, it will take one month to deliver,” a salesperson from a SAIC Volkswagen dealer told “Economic Observer” on June 15.
This is not an isolated case. From ordinary brands to luxury brands, many automobile dealer stores have encountered shortages of chips, resulting in insufficient supply of new cars and delayed delivery times.
Recently, Chen Hong, Chairman of SAIC Group, admitted: “Chips have caused us considerable difficulties, and finished cars in the channel are quite tight.”
The shortage of chips has become a reality. For car companies, grabbing chips has become a necessity. However, what to grab, how to grab, and how much to grab are all questions, and there are also many considerations of interests involved.
After all, the current shortage of chips is essentially a problem of a poorly planned mature process capacity, and the car companies’ hoarding mentality exacerbates the problem.
Gong Min, head of the automotive industry at UBS China, explained to “Economic Observer” that the types of automotive chips currently in short supply are mainly MCUs (Microcontroller Unit) used for control, including small chips for seats and wipers. These are not the currently sought-after advanced products of 7nm and 5nm, but mature processes of tens to hundreds of nanometers. Because mature products meet car standard specifications, they can be used for more than a decade without damage, preventing charge breakdown. Currently, there is no new production capacity for this part of the product, and the industry planning is inadequate. Coupled with everyone scrambling for them, it ultimately leads to a shortage of chips.
More importantly, automobile chips not only face the challenge of short-term production capacity shortage, but also face structural changes in the long-term direction.
Liu Weihong, co-founder of the chip start-up company Heizhima Smart Technology, told “Economic Observer” that as car computers move from a distributed architecture to a central computing platform, the amount of chips used will decrease by an order of magnitude. In the past, a car required 70-300 MCUs, but in the future, only 2-4 SoCs (System on a Chip) and 10-20 high-performance MCUs will be required to meet the computing needs of autonomous driving and intelligent cabins.## Chip Shortage Leads to Insufficient New Car Supply and Delayed Delivery
Despite the hot demand for the new car Weima W6, which received over 6,000 user orders within 50 hours of its sale, the shortage of chips has caused difficulties in delivery, with monthly sales falling short of expectations and production still climbing. This is a challenge for Shen Hui, founder, chairman and CEO of Weima.
On June 16, Shen Hui revealed in an interview with “Finance and Economics,” “From the orders, the sales of W6 are very hot, but it is a new technology car that requires nearly 300 chips. This means that the delivery of W6 is not up to us, but depends on the situation of the chip supply chain.”
Shen Hui introduced that Weima is increasing cooperation with suppliers and taking measures such as paying higher price orders to cope with the problem of chip shortage restricting new car delivery. Weima’s chip suppliers include multiple foreign suppliers including Qualcomm, and will also promote cooperation with domestic chip companies in the future.
This situation is not unique. SAIC-GM, for example, suffered from chip shortage, with a production volume of only 81,000 vehicles in May, down 37.4% from the same period last year. However, due to relatively sufficient inventory in the earlier period, retail sales did not decrease. In May, retail sales reached 128,500 vehicles, even a year-on-year increase of 1.4%.
Regarding this, SAIC Group (600104.SH) stated that affected by the chip shortage in the global automobile industry, recent wholesale sales (car companies’ bulk supply to dealers) lag behind retail sales. It is expected that the chip shortage situation will gradually ease starting from the third quarter, and SAIC will accelerate production pace to dramatically replenish wholesale sales of complete vehicles.
The phenomenon of chip shortage has lasted for half a year, with production significantly restricted on one hand and little impact on end sales until recently, due to the inventory policies of manufacturers and dealerships.
Data from the China Automobile Dealers Association shows that dealer inventories are decreasing. In May of this year, the inventory alert index of automobile dealers was 52.9%, down 1.3% year-on-year and 3.5% month-on-month.
Qiu Kai, director of the Industry Coordination Department of the China Automobile Dealers Association, believes that the shortage of chips has led to a supply shortage in popular car models, with longer vehicle delivery cycles, resulting in unstable sales of dealerships. In addition, dealers’ funds are tied up in in-transit vehicles, causing tight turnover. Coupled with the rise in raw material costs and tighter manufacturer promotional policies, dealers are facing increased operational pressure.>Currently, dealer inventories can meet one and a half months of market demand. However, if the chip issue is not resolved within the year, it is bound to cause an increase in the cost of purchasing new cars. Especially during the “golden September and silver October” peak sales season, phenomena such as price increases, longer waiting times for purchasing and delivery, and lower discounts may become more frequent. At that time, the increase in the used car market may be higher than the seasonal increase of 1-2 points in previous years, reaching 2-3 points. Jiang Chi, an expert in residual value data for blue book prices of automotive data institutions, told Caixin reporters.
Currently, automotive chips are mainly divided into three categories. The first category is responsible for computing power, specifically processor and controller chips, such as central control, ADAS (Advanced Driving Assistance System), and autonomous driving systems, as well as engine, chassis, and body control, etc. The second category is responsible for power conversion, used for power and interfaces, such as IGBT (Insulated Gate Bipolar Transistor) power chips used in new energy vehicles. The third category is used only for sensors, mainly used for various radars, airbags, and tire pressure detection.
In the case of limited supply, automakers will prioritize vehicle models based on priority. From a single vehicle price point of view, the impact of chip shortages on luxury brand models is relatively small, while the impact on ordinary brand models is greater. “Because a 500,000 RMB car and a 100,000 RMB car, the weight will not differ five times, nor will the iron, aluminum, copper and other materials differ five times, but the price will differ five times, so automakers will make a choice.” Gong Min said.
Similarly, from the perspective of driving mode, the impact of chip shortages on electric vehicles is small, while the impact on fuel vehicles is large. Gong Min said that a half-conductor used on an electric vehicle is actually more than that used on a fuel vehicle, but the majority is power semiconductors, and what is currently lacking is the most basic MCU. And under current strict emission standards, automakers will prioritize the production of electric vehicles.
Disruption in the Chip Supply Chain: Who is Creating Panic?
“Generally, the OEM places the order first, the supplier supplies according to the demand, producing as much as needed. But because of the shortage of chips, OEMs have a hoarding mentality, producing as much as possible.” Cemas, a Shanghai-based supplier of automotive welding technology, told Caixin reporters that suppliers are also short of chips, and currently deliver only half of what was expected each month. As a result, even if OEMs want to hoard chips, they cannot.
The hundred-year pandemic, combined with a series of coincidences, has created a once-in-a-century chip shortage in the automotive industry. “Black swans don’t fly one by one, they fly in groups.” Chen Hong compared, “We’ve encountered all the unlucky things. First, Japan had an earthquake, then Texas had a winter storm, and all U.S. semiconductors were in Texas. On March 29th, there was a fire at Renesas in Japan, and the chips burned were mainly supplied to Bosch, which is our main controller supplier.”From a theoretical perspective, the solution to the chip shortage is simply to expand production capacity, which is only a short-term pain. However, the shortage of chips has intensified and has caused disorder in the automotive chip supply chain, and even desperation. Yu Kai, the founder and CEO of Horizon Robotics, stated that many customers who could not obtain the desired chips choose to buy Horizon’s chips and use them for domain controllers.
Replacing one lost item with another may be a helpless act of saving those in desperate circumstances, but some middlemen resort to unscrupulous methods to take advantage of the price difference, which fully demonstrates the confusion in the automotive supply chain after the chip shortage.
Several anonymous insiders told “Finance” reporters that many manufacturers have begun to deliberately hoard chips and maliciously create panic to seek greater benefits. For example, suppliers pass on incorrect information and infinitely amplify their own demands upstream, while using shortages of raw materials as an excuse to play with the concept of hunger marketing downstream.
Driven by interests, the precise transmission of information between the supply and demand sides of automotive chips has been lost, which is extremely detrimental to the recovery of chip supply and has even caused a vicious cycle of panic and desperate measures among related companies.
“Now there is a sense of panic,” said Li Shaohua, Deputy Secretary-General of the China Association of Automobile Manufacturers, frankly to “Finance” reporters. The shortage of chips is no longer just an issue for the automotive industry, but a social problem. The improvement process will last for 1-2 years, and for the automotive industry, there will be a significant improvement by the end of this year.
At present, automakers cannot fully guarantee that their own chips will not suddenly be intercepted or shelved, and they can only allocate personnel to focus on the production of every chip. This is not only to ensure the production of the vehicle model, but also because once the chip of a certain model is suddenly discontinued without a plan, the inventory of other parts will pile up in a short period of time, causing huge impacts on the production of automakers.
This places extremely high demands on the response speed and coordination ability within automakers. Yang Dongsheng, the Dean of the product planning and new automotive technology research institute of BYD, said: “Our R&D department now has to monitor materials, monitor each chip, and take action immediately once there is a warning.”
Geely Automobile (00175.HK) told “Finance” reporters that many chip original equipment manufacturers have already lengthened their procurement cycle from the original 12-20 weeks to 40-50 weeks. One of the short-term measures taken for the chip shortage is to lock in long-term orders from suppliers for 6-12 months.
In the long run, automakers hope to delve into the entire process of chip production. “From the future development, when automobiles move toward intelligentization with intelligent chips, it is essential that vehicle manufacturers communicate directly with the chip manufacturer,” journalist learned from Chen Hong. Because vehicle manufacturers need to master algorithms and software, there is a necessity for direct communication with chip manufacturers. Many chip manufacturers have now understood this trend of change and are willing to communicate directly with vehicle manufacturers.
Several experts warned that a chip surplus crisis may occur.After the chip shortage led to production stoppages in the automobile industry, companies in the chip supply chain’s first reaction was to expand production capacity.
Intel plans to invest $20 billion to build two new chip factories in the United States, and also plans to invest in building factories in Europe. Apple has also announced that it will invest €10 billion in building a chip research and development center in Europe. Bosch Group has also built a second wafer factory, with vehicle chips expected to go into production in September of this year.
On May 21, TSMC announced plans to increase MCU production by 60% compared to 2020. SMIC’s 2020 annual report showed that its factories in Shanghai, Beijing, Tianjin, and Shenzhen are all expanding production lines, with progress exceeding 70%.
Wang Xuehe, general manager of SAIC Infineon, is worried that the intensive investment and expansion of chip production will lead to a surplus crisis of chips. He told reporters from “Caijing”, “The semiconductor industry is very volatile. It is possible that one day it will turn from a shortage to a surplus, and chip depreciation and inventory will become very risky for enterprises.”
Zhang Qiang, CEO of Infervision, has the same concerns. He analyzed that the total output of automobiles is a relatively stable value. If the demand for intelligentization does not increase rapidly, that is to say, if the number of automobile chips or the usage area of silicon chips in each car does not increase too much, with the current capacity, there will definitely be an excess.
It is particularly noteworthy that the phenomenon of chip shortage is full of dynamic changes. “Many people say that the entire automobile industry has been short of chips for more than half a year, why can’t it catch up?” NIO’s co-founder and CEO Qin Lihong recently publicly stated, “The fact is that the automobile industry has faced chip shortages in the past three quarters, but the chips that are lacking each week are different, and we don’t know what the next shortcoming is. It’s like cooking in a restaurant. Now we have less oil, and the next time we have less vinegar. Different local impacts continue to exist.”
The period for building a new wafer factory is usually 1-2 years. That is, the factories currently under construction will start to release production capacity 1-2 years later. According to the consulting company Gartner’s prediction, global semiconductor supply will recover to normal levels in 2022, when the capacity released will coincide with the period of abundant chip supply, leading to an excess of chip production capacity.
On the other hand, the architecture of automotive computers is undergoing changes, resulting in an increasingly reduced demand for chips.
Liu Weihong told “Caijing” reporters that traditional automotive computers use a distributed ECU architecture, requiring 70-300 MCU chips per vehicle, while the current domain architecture used for autonomous driving only requires 4-8 SoC chips and 40-60 MCU chips. The future central computing architecture will require even fewer chips, only 2-4 SoC chips and 10-20 high-performance MCU chips, to meet the computing needs for autonomous driving and intelligent cabins.## Is the Chip Shortage Short-Term or Long-Term?
Almost all institutions predict that the chip shortage will be effectively resolved this year or next year, and there may even be a surplus situation. However, this is based on the current vehicle-grade chip structure. In fact, as the development of electric and intelligent vehicles, the demand for chips in the automotive industry will also undergo enormous changes.
This means that automotive chips not only face the challenge of short-term production capacity shortages, but also long-term structural changes.
Li Yunfei, the brand and public relations manager of BYD, told “Caijing” reporters: “The cost of chip for a fuel vehicle is about $100-$200, and for an electric vehicle, the cost may start at about $1000, and in the era of intelligent electric vehicles, the cost of a single chip may double to $4000-$5000, or even more for luxury cars.”
The leap in the value of automotive chips is reflected not only in quantity, but also in function.
There are three main types of chips, and as the automotive control structure changes, the demand for various types of chips will also change. However, the chip industry is not a fast-responding industry. Especially for vehicle-grade chips, they have the characteristics of large investment, long certification period, long research and development cycle, and high design threshold. Just the validation process alone may take several years.
Geely Automotive introduced a comprehensive long-term chip plan to “Caijing” reporters: starting from establishing direct communication channels with international mainstream semiconductor suppliers to avoid risks at the source; then participating in research and development plan selection and jointly formulating future technology routes and supply channels with major chip suppliers; directly signing price agreements with chip suppliers to reduce the problem of low bargaining power of scattered procurement suppliers and support the organizational capabilities of domestic electronics product suppliers; and promise to support domestic chip companies and use domestically-made chips to replace imported chips with the same quality.
Zhang Yufeng, Vice President of Horizon Robotics and General Manager of the Intelligent Driving Product Line, told “Caijing” reporters that automakers increasingly hope to communicate and cooperate directly with chip manufacturers, so chip manufacturers with core algorithm capabilities will get closer and closer to automakers.
Correspondingly, the development of intelligent electric vehicles has reached a point where every second counts. A new car, if not replaced, often loses its competitiveness quickly within 1-2 years. More importantly, how to achieve the endpoint of intelligent electric vehicles – autonomous driving cars is still controversial.
Fubingfeng, Executive Vice Chairman and Secretary-General of the China Association of Automobile Manufacturers, told “Caijing” reporters: In addition to the small chips for autonomous driving, which require special fine processes to manufacture, other automotive chips only need 28 nanometers. The current chip shortage is not entirely a technical problem, but mainly because it was not given enough attention before. The level of attention has greatly increased, but the reality of whether investment is appropriate and what the production costs will be after that should also be considered.This means that car manufacturers themselves do not even know what kind of chips future cars will need, let alone chip suppliers. Changes are happening all the time, but the direction of change cannot be determined. In such an automotive industry, who can assert that there will be no chip shortage in the future?
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.