TAIPEI/SHANGHAI/SINGAPORE, July 19 (Reuters) – From his small office in Singapore, Kelvin Pang is willing to gamble a $23 million payday that the worst chip shortage for automakers isn’t over — at least in China.
Pang has purchased 62,000 microcontrollers, chips that help control a range of functions from car engines and transmissions to power systems and electric vehicle charging, each costing the original buyer in Germany $23.80.
He now wants to sell them to auto parts suppliers in the Chinese technology hub of Shenzhen for $375 each. He says he has turned down offers for $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 boxed in a Hong Kong warehouse for the time being.
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“Automakers need to eat,” Pang told Reuters. “We can afford to wait.”
The 58-year-old, who refused to say what he himself paid for the microcontrollers (MCUs), makes a living trading surplus electronics inventory that would otherwise be scrapped, connecting buyers in China with sellers abroad.
Global chip shortages over the past two years — caused by pandemic supply chaos coupled with booming demand — have turned a high-volume, low-margin trade into one with the potential for profitable deals, he says.
Order times for automotive chips remain long around the world, but brokers like Pang and thousands like him are focused on China, which has become ground zero for a crisis the rest of the industry is beginning to move beyond.
According to a Reuters survey of 100 automotive chips produced by the top five manufacturers, orders received worldwide average about a year.
To counteract the supply squeeze, global automakers such as General Motors Co (GM.N), Ford Motor Co (FN) and Nissan Motor Co (7201.T) have moved to secure better access through a playbook that involves direct negotiations with chip manufacturers included. pay more per part and accept more inventory.
For China, however, the outlook is bleaker, according to interviews with more than 20 people involved in the trade, from automakers, suppliers and brokers to experts from the government-affiliated auto research institute CATARC.
Despite being the world’s largest maker of cars and a leader in electric vehicles (EVs), China relies almost entirely on chips imported from Europe, the United States and Taiwan. Supply shortages were compounded by a zero-COVID lockdown in the Shanghai auto hub that ended last month.
As a result, the shortage is more acute than elsewhere and threatens to dampen the nation’s momentum for electric vehicles, according to CATARC, the China Automotive Technology and Research Center. A burgeoning domestic chip manufacturing industry is unlikely to be able to cope with demand within the next two to three years, it said.
For his part, Pang sees China’s shortages lasting until 2023 and deems it dangerous to hold stocks after that. The only risk to that view, he says: a deeper economic slowdown, which could depress demand sooner.
FORECAST “HARDLY POSSIBLE”
Computer chips or semiconductors are used by the thousands in every conventional and electric vehicle. They help control everything from airbag deployment and emergency braking automation to entertainment systems and navigation.
The Reuters poll, conducted in June, sampled chips made by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas that perform a variety of functions in cars.
New orders through distributors will be on hold for an average lead time of 49 weeks — deep into 2023, according to the analysis, which provides a snapshot of global shortages but no regional breakdown. Delivery times range from 6 to 198 weeks.
German chipmaker Infineon (IFXGn.DE) told Reuters that it is “rigorously investing in and expanding manufacturing capacity globally,” but said shortages of chips outsourced to foundries could continue into 2023.
“Since the geopolitical and macroeconomic situation has deteriorated in recent months, reliable assessments of the end of the current bottlenecks are currently hardly possible,” said Infineon in a statement.
Taiwan-based chipmaker United Microelectronics Corp (2303.TW) told Reuters that it was able to reallocate some of its capacity to auto chips due to weaker demand in other segments. “Overall, it’s still a challenge for us to meet overall customer demand,” the company said.
TrendForce analyst Galen Tseng told Reuters that if auto parts suppliers needed 100 PMIC chips – which regulate the voltage from the battery for more than 100 uses in an average car – they would currently only get about 80.
URGENTLY LOOKING FOR CHIPS
The tight supply conditions in China contrast with the improved supply outlook for global automakers. Volkswagen, for example, said in late June it expected chip shortages to ease in the second half of the year. Continue reading
The chairman of Chinese EV maker Nio, William Li, said last month it was difficult to predict which chips would become scarce. Nio regularly updates its “risk chip list” to avoid running out of any of the 1,000+ chips needed to run production.
In late May, Chinese EV maker Xpeng Motors (9868.HK) made the case for chips with an online video featuring a Pokemon toy that also sold out in China. The hopping, duck-like figure waves two signs: “urgently looking” and “chips.”
“As the auto supply chain gradually recovers, this video captures the current state of our supply chain team,” Xpeng CEO He Xiaopeng posted on Weibo, saying his company is struggling to secure “cheap chips” needed to build cars are needed.
ALL ROADS LEAD TO SHENZHEN
The struggle for workarounds has led automakers and suppliers to China’s main chip trading hub, Shenzhen, and the “grey market,” brokered supplies sold legally but not authorized by the original manufacturer, according to two people familiar with trading at a Chinese electric vehicle maker are and a car supplier.
The gray market poses risks, as chips are sometimes recycled, improperly labeled, or stored in conditions that damage them.
“Brokers are very dangerous,” said Masatsune Yamaji, research director at Gartner, adding that their prices are 10 to 20 times higher. “But in the current situation, many chip buyers depend on the brokers because the authorized supply chain cannot support the customers, especially the small customers in automotive or industrial electronics.”
Pang said many brokers in Shenzhen are newcomers attracted by the price hike but are unfamiliar with the technology they buy and sell. “They only know the part number. I ask her: Do you know what that does in the car? They have no idea.”
While the volume held by brokers is difficult to quantify, analysts say it’s far from enough to meet demand.
“It’s not like all the chips are hidden somewhere and you just have to get them to market,” said Ondrej Burkacky, senior partner at McKinsey.
If supply normalizes, there could be an asset bubble in Shenzhen’s unsold chip inventory, analysts and brokers have warned.
“We can’t hold out too long, but automakers can’t hold out either,” Pang said.
China, where advanced chip design and manufacturing still lags behind foreign competitors, is investing to reduce its reliance on foreign chips. But that’s not going to be easy, especially given the stringent requirements for auto-grade chips.
MCUs account for about 30% of the total chip cost in a car, but they’re also the category in which China has the hardest time achieving self-sufficiency, said Li Xudong, senior manager at CATARC, adding that domestic players are only at the low end had reached the market with chips used in air conditioning and seat controls.
“I don’t think the problem can be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We rely on other countries because 95% of the wafers are imported.”
Chinese EV maker BYD, which started designing and manufacturing IGBT transistor chips, is emerging as a domestic alternative, said CATARC’s Li.
“China has long viewed its inability to be fully independent of chip production as a major security weakness,” said Victor Shih, a professor of political science at the University of California, San Diego.
Over time, China could build a strong domestic industry, just as it did when it identified battery production as a national priority, Shih added.
“It led to a lot of waste, a lot of failures, but then also two or three giants that now dominate the global market.”
(Corrected to delete incorrect reference to average lead time for chip orders in paragraph 16. Previously corrected story to correct attribution in paragraph 34 to CATARC’s Li Xudong and not Nio’s William Li.)
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Reporting by Sarah Wu, Zhang Yan, Kevin Krolicki, Jane Lanhee Lee, Tim Kelly, Chen Lin; Additional reporting by Norihiko Shirouzu in Beijing; Editing by Pravin Char
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