Domestic cars save the "chip": How far are Chinese car companies from "chip freedom"?

Recently, the news of SAIC Volkswagen and FAW-Volkswagen's production suspension revealed that automakers are short of "chips" and "components", and also caused the insufficient supply of automotive chips to attract attention from both inside and outside the industry.

Li Shaohua, deputy secretary-general and director of the Industry Development Department of the China Association of Automobile Manufacturers, also recently stated that due to the shortage of chip supply, the production of some companies may be greatly affected in the first quarter of 2021.

Regarding the current supply of chips and parts, as well as the production arrangements for 2021, a reporter from China Business News wrote and called several independent brands and joint venture brand companies under Changan Automobile Co., Ltd. (000625.SZ, hereinafter referred to as "Changan Automobile") and Guangzhou Automobile Group Co., Ltd. (601238.SH, hereinafter referred to as "GAC Group") to learn more information.

Among them, GAC Nio New Energy Automobile Technology Co., Ltd., a subsidiary of GAC Group, told reporters: "There is no shortage of supply at present, because in early 2020, based on the judgment of the situation, the company has asked tier 1 suppliers to strengthen the distribution of goods. Judging from the current status and planning, there will be no problem with production and delivery in 2021."

GAC Passenger Vehicle Co., Ltd. (hereinafter referred to as "GAC Passenger Vehicle") admitted in its reply: "There is indeed a shortage of chip supply at present, but it has no impact on vehicle delivery."

According to him, in order to cope with this situation, GAC Passenger Vehicle has already ordered imported chips needed for 2021 in advance, while promoting domestic substitution solutions. With the continuous breakthroughs in domestic chip technology, the localization rate of chip use will continue to increase in the future.

When car companies are "stuck" by chip shortages, switching to domestic chips seems to be a "promising future." But how far are Chinese car companies from "chip freedom"? Industry insiders have different opinions.

Decoding the automotive electronics industry chain

Relevant data shows that the automotive electronics industry chain is mainly composed of three levels: the upstream is electronic components, the midstream is system integrators, and the downstream is vehicle manufacturers.

Specifically, the upstream includes Tier 2 and Tier 3. Among them, Tier 2 manufacturers are responsible for providing relevant core chips and other discrete devices for automotive electronics, mainly including IC design manufacturers such as NXP, Infineon, as well as automotive high-power diode manufacturers, discrete component manufacturers, etc. Tier 3 back-end factories provide foundry and packaging and testing services for Tier 2 manufacturers.

The midstream system integrator Tier 1 mainly designs, produces and sells automotive electronic modular functions, including companies such as Bosch, Continental, and Delphi, while the downstream are vehicle manufacturers and repair shops.

"The vehicle production line is heavily dependent on chip supply. A chip supply cut will cause the vehicle production line to stop production, but chip manufacturers do not cooperate directly with the OEMs." Mr. Ni (pseudonym), who works in a car company and is responsible for controller development, described the relationship between OEMs and chip manufacturers in daily work.

He said: "The OEM puts forward functional requirements, and the supplier formulates a plan based on the requirements and then participates in the bidding. The plan includes how to realize the function, how to do quality control, which company's chip to use, etc. The OEM generally does not control the use of chips, but chips like smart driving must be decided by negotiation between the OEM and the supplier."

Take FAW-Volkswagen and SAIC Volkswagen, which were recently reported to have stopped production, as examples. Both of them were unable to produce two major modules, ESP (electronic stability program system) and ECU (electronic control unit), namely the on-board computer, due to the shortage of automotive chips.

What role do OEMs play in this industry chain? Mr. Ni told reporters that in the traditional vehicle controller development model, the OEMs are responsible for functional requirements and quality control, and divide the functions of the vehicle into certain functions, such as ESP, air conditioning, gateway, etc. However, due to the large number of functions, most OEMs cannot directly control the specific chip level.

Compared with the upstream suppliers in the industry chain, OEMs are more directly in contact with midstream suppliers. Regarding the selection criteria for midstream suppliers, an insider from the R&D department of a South China automaker revealed: "First, they must have strong technical expertise in their field and be able to meet the needs of OEMs. Secondly, on the premise that performance meets the standards, we will conduct a comprehensive assessment of the quotation information, risk control capabilities, R&D process quality management system, and after-sales service attitude."

In the automotive electronics industry chain, on the one hand, the OEMs choose midstream suppliers; on the other hand, midstream parts suppliers also need to purchase different chips from downstream. Mr. Ni said that parts manufacturers are responsible for demand decomposition and specific software and hardware development. As for the specific chip solutions used, Tier 1 companies such as Bosch, Continental, and Delphi will choose the most cost-effective implementation solution based on their own procurement channels.

According to a report by market research firm Strategy Analytics, the top five automotive semiconductor manufacturers in the world in 2019 were Infineon, NXP, Renesas Electronics, Texas Instruments and STMicroelectronics. According to data released by ICVTank, the global automotive chip market size reached US$46.5 billion in 2019, a year-on-year increase of 10.7%.

How far is “chip freedom”?

According to data from the China Automotive Chip Industry Innovation Strategic Alliance, the scale of my country's independent automotive chip industry accounted for only 4.5% of the world's total in 2019. With the recent exposure of the shortage of automotive chips, the call for domestically produced chips to save the chip market has become louder and louder.

Regarding the actual "position" of Chinese companies in the global chip industry, senior automotive analyst Zhang Xiang told reporters that European and American manufacturers such as Infineon and NXP have already formed a monopoly in the chip industry, with advantages such as high output and low cost. In addition, chip technology is updated and iterated rapidly, making it difficult for Chinese companies to catch up in a short period of time.

"In fact, the companies currently involved in my country's chip industry mainly have design capabilities but lack production capabilities. In the specialized international division of labor, chip production is mainly outsourced to companies such as TSMC and Samsung," said Zhang Xiang.

It is worth noting that Semiconductor Manufacturing International Corporation (688981.SH, hereinafter referred to as "SMIC"), which has attracted much attention recently, is also engaged in integrated circuit manufacturing. However, recent public information shows that SMIC has entered mass production of "28nm, 14nm, 12nm and n+1 technologies", while TSMC has achieved mass production of 5nm chips, and there is still a certain gap between the two.

"Currently, SMIC's production scale and technological accumulation are still weaker than TSMC, and it ranks second in the international arena." On the one hand, the chip production capacity is insufficient. On the other hand, Zhang Xiang also admitted that although Chinese chip companies have developed tire pressure monitoring sensor chips, navigation chips and other products, in the traditional automotive field, core key technologies such as engine management system chips and transmission control unit chips are still controlled by foreign suppliers.

In addition, Mr. Ni also further explained to reporters the logic of car companies' selection of midstream and downstream suppliers from the perspective of OEMs: "Unlike consumer electronics chips, automotive chips require more reliability and safety, and must undergo a series of experimental verifications within the 2-3 year cycle of vehicle development."

Taking the ESP supplied by Bosch to many car companies as an example, in addition to the technical advantages, Mr. Ni also mentioned the advantage of Bosch ESP's continuous updating and iteration. "Bosch supplies a large amount of ESP to car companies. After years of testing and experiments, it can find loopholes in ESP and continuously optimize it. If car companies choose new suppliers, they lack this kind of accumulation of quantity and the reliability will decline."

Although it is difficult to stand out from foreign companies in mastering core chip technologies in the traditional automotive field, Zhang Xiang also pointed out that many Chinese companies have recently entered the chip industry, focusing on seeking breakthroughs in fast-growing emerging fields such as artificial intelligence (AI), autonomous driving, and vehicle-to-vehicle wireless communication technology (V2X).

According to the reporter's analysis, many domestic car companies are directly involved in chip research and development or cooperating with domestic chip companies.

For example, Changan Automobile equipped the UNI-T, the first model of its own brand gravity series, with the Horizon AI chip, the Journey II, which has a computing power of 4 trillion times per second. This is also China's first automotive-grade AI chip. In the field of electric vehicles, BYD Semiconductor, a subsidiary of BYD Co., Ltd. (002594.SZ, hereinafter referred to as "BYD"), has achieved results in the "CPU" of the automotive power system - IGBT module, and is in a leading position in China.