Thinking about the supply and demand of core automotive parts

01

Leading to an imbalance in supply and demand of core components

What are the factors?

1.1 What are the main factors leading to the imbalance between chip supply and demand under the changes in the supply structure of core components?

Automotive-grade chips are different from consumer-grade and industrial-grade chips. Automotive-grade chips have inherent disadvantages in the development of high-performance R&D and large-scale mass production due to their greater demands on the external environment, longer development cycles, stricter reliability requirements, and longer service life.

In addition, as the average number of chips installed in smart electric vehicles has increased in recent years, the current chip supply cannot meet demand.

iResearch divides the 2022 "chip shortage" problem into six main reasons: difficulty in chip production, rapid demand growth, unbalanced supply and demand structure, insufficient production capacity of upstream companies, the impact of the epidemic, and serious hoarding of inventory by automakers.

In addition to the difficulty in producing automotive-grade chips and car companies' stockpiling of goods, there are also many problems in the automotive chip supply chain.

In particular, upstream companies, in addition to producing automotive chips, also produce chips for mobile phones, computers, etc. to occupy production lines; the impact of the epidemic has forced upstream companies to suspend operations and production; the overall level and output of independent chip companies are insufficient to support a larger market, and they have failed to form a strong connection with the OEMs.

These supply chain problems expose the vicious development of China's supply and demand structure. Supply chain structure problems are the main reason for China's chip shortage.

1.2 What are the main factors leading to the imbalance between battery supply and demand as the supply structure of core components changes?

The main reason for the mismatch between supply and demand of power batteries is that demand has grown rapidly, while the corresponding product supply has not kept up. In 2021, installed capacity suddenly surged to 154.5 GWH, an increase of 143% compared to 2020.

At the same time, with the rising prices of upstream raw materials, the shift from "shortage of electricity" to "expensive electricity" has made the battery supply shortage problem increasingly serious.

The competition landscape of power batteries has basically taken shape. According to the installed capacity of Chinese power battery companies from January to November 2022, CATL and BYD ranked first and second, with a combined market share of more than 70%.

The top 10 companies have a market share of nearly 95%. E-IO think tank believes that the installed capacity of power battery companies has a significant head effect. Due to the strong demand of OEMs for high-performance power batteries, the battery technology of the head companies is relatively cutting-edge and has the ability to mass produce, so there is a "one-sided" situation.

02

Insufficient supply of core components exposed

What are the problems in the smart electric vehicle supply chain?

2.1 Under the imbalance between supply and demand, what development problems are exposed in the supply chain of core components for smart electric vehicles?

The "chip shortage and power shortage" problem that has plagued the automotive industry for more than a year can be traced back to the lack of coordinated supply guarantee between the upstream and downstream of the smart electric vehicle industry chain.

iResearch believes that the main development problem of China's smart electric vehicle core component supply structure is the long supply chain, with Chinese OEMs being "big but not strong" and component companies being "numerous but not strong."

Currently, China's supply chain of core components for smart electric vehicles is being reshaped, and the entire supply chain tends to be coordinated and integrated to seek steady development.

iResearch believes that solving supply chain development problems requires reducing the links from the production end to the use end, shortening the supply chain, improving supply chain resilience, and building an autonomous and controllable supply chain.

OEMs work with suppliers to build an independent development ecosystem to form an independent and controllable supply system, and companies accelerate collaborative development and close cooperation, thereby strengthening the supply structure, accelerating independent research and development, and consolidating corporate product innovation capabilities.

2.2 What changes will China's smart electric vehicle industry experience as a result of changes in the core component supply chain?

The transformation of the core component supply chain has caused significant changes in China's smart electric vehicle industry. iResearch believes that during the transformation, China, based on its strong manufacturing industry, will accelerate the promotion of an independent innovation system for the supply chain and have the opportunity to overtake other countries and become the development center of the world's automotive industry. Core components will play an important role in the global supply chain.

From the perspective of the traditional supply system, due to the strong substitutability of traditional components, slow product iteration, and low technical barriers, a supply and demand relationship structure will appear where supply exceeds demand. As a buyer's market, the OEMs have a greater say.

However, with the development of smart electric vehicles, core components have become more scarce, suppliers' technical barriers have increased, and a supply-demand structure where supply is less than demand has emerged, causing OEMs to gradually lose their voice.

In such a supply and demand relationship, OEMs often compromise with suppliers due to the lack of parts.

2.3 In the context of long chip development cycles and rapid iterations, how can OEMs effectively integrate the chip supply chain?

Taking into account the vehicle project development process and the chip design and development process, it takes 3.5 to 5.5 years from chip design to mass production. After the chip is installed on the vehicle, it must try to meet the OTA upgrade and iteration needs within the 5 to 10 year life cycle of the automotive product.

iResearch believes that deep ties between OEMs and chip manufacturers are inevitable, and improving product definition and design foresight through in-depth cooperation has become a major development point.

OEMs can solve most of the problems through effective integration of the chip supply chain.

iResearch believes that OEMs need to select high-quality and suitable chip suppliers in the early stage, and establish a long-term and solid supply system through in-depth cooperation; during the front-end chip design and development, they need to clarify their own needs and promote the development plan of high-computing power chips; strengthen the combination of software and hardware to enhance the resilience of the supply chain.

2.4 There are both challenges and opportunities for OEMs to enter the battery industry. How will they integrate the battery supply chain?

The market concentration of power batteries is relatively high. Coupled with the short supply of power batteries, battery suppliers currently have a greater say and the OEMs' ability to control the industrial chain has been weakened. Currently, OEMs are strengthening their control over the battery supply chain.

iResearch believes that the integration of the battery industry chain by OEMs presents both challenges and advantages. As the downstream demand side, OEMs have a relatively obvious demand for mass production. Strengthening supply chain integration can achieve a latecomer advantage, but the battery industry has a significant head effect, and OEMs need to gradually accumulate their upstream integration capabilities.

Currently, most OEMs have basically acquired the ability to produce PACKs on their own, and have expanded into upstream battery layouts through equity investment, joint ventures, and independent research and development.

By entering the power battery industry through these three methods, OEMs can ensure the stability of battery supply.

iResearch believes that OEMs developing and producing their own batteries and building independent factories can compete with external procurement and help control costs.

In addition, self-developed power battery products can better match vehicle needs and improve the competitiveness of terminal products.

03

The shortage of core components has a great impact on OEMs

What impacts did it have?

3.1 In the context of “chip and power shortages”, what are the main impacts of core component supply chain issues on OEMs?

The automotive industry’s “lack of chips and electricity” has seriously affected industrial development and brought indelible impacts to downstream OEMs.

iResearch believes that due to the supply chain problems of chip and power shortages, the cost of OEM products has increased significantly, production capacity has dropped significantly, and most OEMs are in a loss-making state, with only a few companies making profits.

Due to the shortage of chips and electricity, it is estimated that the global automobile market will have reduced production by about 3.9 million vehicles in 2022, of which China is expected to reduce production by 255,000 vehicles throughout the year.

According to the analysis of iResearch, in the announcements released by most OEMs, the reason for the price increase of vehicle models all pointed to "the impact of the continued sharp rise in raw material prices."