Decoding the true level of China’s automotive chips: how far is it from the world’s top level?

The impact of the COVID-19 pandemic on all walks of life is still ongoing. Focusing on the automotive industry, the global chip shortage has affected the production operations of many automakers and even threatened the security of the global automotive industry supply chain.

Global automakers suspend production one after another

In fact, since the second half of last year, chip shortages have become a headache for automakers, but it was not until recently that the news of Volkswagen's suspension of production due to chip shortages attracted widespread attention.

On December 6, 2020, Volkswagen publicly stated that due to the shortage of semiconductor chips, Volkswagen will adjust its vehicle production in China, North America and Europe.

A month after Volkswagen could no longer withstand the pressure brought by the chip shortage, more and more car companies including Audi, Ford, Toyota, Honda, FCA, Nissan, Daimler, Subaru, etc., also announced production cuts and suspensions due to chip shortages.

So the question is, what’s wrong with automotive chips and why are they in such short supply?

8-inch wafers are out of touch with the times

It all starts with the history of the 8-inch (20mm) wafer.

Regarding the evolution of wafer size, a generally accepted view in the industry is that 4-inch silicon wafers were the mainstream in the 1980s, 6-inch wafers were the mainstream in the 1990s, 8-inch wafers were the mainstream in the 2000s, and 12-inch wafers have become the mainstream since 2008.

As can be seen from the above table, 8-inch wafers were launched on the market as early as 1992; by 2007, the number of global 8-inch wafer production lines reached its peak - 199, and the production capacity also reached a historical high of 5.6 million wafers per month.

Why was 2007 the historical high? Because the world encountered a financial crisis in 2008, and all industries, including the semiconductor industry, suffered heavy losses. Therefore, since 2008, under the double pressure of the financial crisis and the rise of 12-inch wafers, the number and production capacity of 8-inch wafer fabs have shrunk rapidly, and by 2015, there were only 178 production lines left.

If we follow Moore's Law, everything is moving in the direction of innovation, and wafers are developing towards 12 inches and above, then the decreasing demand for 8-inch wafers is also a reasonable historical trend.

However, since the application areas of 8-inch wafer chips are very wide, covering various market segments such as consumer electronics, communications, computing, industry, and automobiles, as the Internet of Things enters a mature stage, the demand for 8-inch wafers has not decreased, but has increased instead.

▲Here we have to mention the difference between 8-inch and 12-inch wafers. 12-inch wafers are mainly used in memory, CPU manufacturing and other high-performance chips, such as various PCs, tablets, mobile phones, etc. 8-inch wafers are mainly used in special technologies or differentiated technologies, such as various power chips, photography/fingerprint recognition sensors, wireless communication chips, smart cards, etc., covering almost all markets.

On the one hand, the number of 8-inch wafer foundries has decreased, and on the other hand, the demand has continued to increase, which has added additional burdens to the 8-inch production capacity. Therefore, by 2017, the demand for 8-inch silicon wafers began to exceed production capacity, and the supply tension became increasingly severe.

The trigger of the chip crisis

Having said so much, I believe everyone has a general understanding of 8-inch wafers. Back to the automotive field, the chips in short supply in this automotive chip crisis are precisely the widely used 8-inch wafers.

To sum up, 8-inch wafers are not high-end chips. For chip foundries, they are just outdated products with small profits but quick turnover, and their profitability is far lower than that of 12-inch wafers.

Moreover, the equipment for producing 8-inch wafers has either been discontinued long ago or is too old to be repaired. It is not difficult to understand why many chip foundries have stopped the production and sales of 8-inch wafers and switched to the production of 12-inch wafers.

For a long time, chips have been in a tight balance of supply and demand between upstream chip suppliers and downstream automobile manufacturers, but the outbreak of COVID-19 has suddenly rewritten the normal distribution of this industrial chain.

From the supply side, due to the impact of the epidemic in the first half of 2020, global automakers were not optimistic about their estimates for automobile sales in 2020, which to a certain extent inhibited the production plans of automotive chips.

From the demand side, China's auto sales surged in the second half of 2020, exceeding expectations, helping global auto sales reach approximately 76.5 million units for the full year. The strong recovery caught both automakers and the upstream industrial chain off guard.

When automakers hope that upstream chip foundries will restore production capacity of automotive chips, the foundries have already allocated their production capacity to the consumer electronics field, where chip supply is also tight, and there is no time to fully realize supply docking and push.

In general, the insufficient production of 8-inch wafer chips and the impact of the epidemic have jointly ignited the fuse of the chip crisis. It is not difficult to judge from this that the chip shortage cycle in the global automotive industry is very likely to last for most of 2021.

The lack of automotive chips is like the lack of "soul"

It has to be admitted that the mismatch of resources in the chip industry and the mismatch of market supply and demand are the deeper reasons for the shortage of automotive chips.

At present, there are more and more manufacturers engaged in chip design around the world, but due to the high barriers of cost and technology, there are fewer and fewer manufacturers engaged in chip manufacturing. As a result, there are no manufacturers to take orders for the designed chips, and production capacity is therefore suppressed.

In order to obtain a little production capacity, there was an embarrassing situation in the industry where the CEO of a chip design company knelt down before the executives of a foundry.

In the longer term, even if the supply gap of automotive chips is filled within a year, the tight balance of supply and demand in the entire market will not be easily broken. The fundamental reason behind this is the electrification, intelligence and networking of automobiles. Under this trend, the automotive industry's demand for chips will only increase exponentially.

Generally speaking, automotive chips can be divided into three categories according to their functions:

The first category is the ESP (electronic stability control system) and ECU (electronic control unit) responsible for computing power, which are distributed in processor and controller systems, such as central control systems, autonomous driving and auxiliary systems, as well as engine, chassis and body control;

The second category is IGBT (insulated gate bipolar transistor) and MOSFET (metal-oxide semiconductor field effect transistor) responsible for power conversion, which are distributed in power supply and interface;

The third category is sensors, which are mainly used for various radars, airbags and tire pressure detection.

It is not difficult to find that chips have long become the decision-making brain of the car and the nervous system throughout the car.

Usually, the most basic driving assistance system and navigation system in a traditional fuel vehicle requires 50 to 150 chips and sensors to control. The value of the chips installed in an ordinary new energy vehicle is twice as much as the former.

Among them, the well-known ECU (electronic control unit) and ESP (electronic stability program) are the most widely distributed, and they are made of the 8-inch wafers that are currently in short supply. Volkswagen has stopped production due to the shortage of ECU and ESP, which are just two of the many automotive chips.

As we enter the era of intelligence, automobiles will have higher and higher demands for chip quality and quantity.

According to Strategy Analytics data, the global installation volume of automotive MCUs (microcontroller units, the most important functional chips for automobiles) exceeded 2.5 billion in 2019. The top five suppliers of automotive MCUs in the world are Infineon, NXP, Renesas Electronics, Texas Instruments, and STMicroelectronics. These foreign semiconductor companies dominate the Chinese market share, and my country's self-sufficiency rate for automotive chips is less than 10%.

In this context, it is obviously a helpless solution for car companies to deal with the chip crisis by suspending production, but apart from this, are car manufacturers really unable to break the chip shortage crisis?

China's first IGBT full industry chain

Looking at the domestic market, BYD seems to be unaffected at all amid the global "chip panic".

Recently, BYD responded to the "bottleneck" problem of automotive chip shortage. The official said that the IGBT chips produced by the company have been used in various product lines. In addition to the brand's own use, they have also been exported, and there is no "bottleneck" problem.

BYD's ability to remain unaffected during such a difficult period is inseparable from its powerful self-developed core technology. You should know that BYD is not just an automobile manufacturer, but more like Huawei, a generalist across multiple industrial fields.

In 2005, BYD formed a team to enter the MCU field and launched the first generation of IGBT technology in 2009. IGBT is a type of automotive power semiconductor. Its chip and power battery cell are called the "dual core" of electric vehicles. It is a key technology that affects the performance of electric vehicles and accounts for about 5% of the cost of the whole vehicle.