How the Shortage of Chips is Affecting China

The shortage of computer chips is causing production downtime worldwide. China in particular is feeling the consequences. The trigger of the shortage is the rivalry with the USA – but also hamster purchases by Chinese companies.

China is one of the reasons for the global chip shortage. At the same time, the People’s Republic itself suffers enormously from the fact that there are too few semiconductors worldwide. One of the triggers was the announcement by then US President Donald Trump.

His government threatened to impose sanctions on China to cut the country off from the global semiconductor market. This announcement alone was enough to persuade Chinese companies to buy up chips on a large scale at short notice around the world.

This initially helped the Chinese tech and electronics industry. But at the same time, the move has completely thrown the so-called just-in-time production of large international corporations out of sync. In the automotive industry, for example: Cars can no longer be built without special chips, especially no e-cars with their particularly complex control electronics. It is not only the conflict between China and the USA that is to blame for the global shortage of computer chips. The corona-related supply chain problems are also affecting the semiconductor industry. In addition, a major fire in a chip factory in Japan and the shortage of water in Taiwan in the spring meant that some important chip manufacturers were unable to manufacture.

The US increases the pressure The ASML case shows how much geopolitics is now playing a role in the global computer chip crisis. The Dutch company builds special machines for the high-tech computer chip industry. Under pressure from the US government, ASML is no longer supplying Chinese companies, at least not with the best and most modern chip-making machines, making it more difficult for China‘s semiconductor industry to become completely independent from the rest of the world. However, the state and party leadership is sticking to the goal of so-called chip self-sufficiency: They want to make China independent of manufacturers from other parts of the world in the medium to long term. Not only would the domestic electronics and auto industries benefit from this, but also the Chinese military.

Chip shortage is unexpected interference brought by the epidemic

The shortage of chips is closely related to the spread of the epidemic. From the sharp drop in demand to the self-insurance of chip companies, a supply hedging adjustment strategy has been formed. In the spring of 2020, the world is in the early throes of the new crown epidemic. The epidemic has impacted demand. At that time, chip companies considered survival, so shrinking is a reasonable choice. However, after the epidemic stabilized, when the economies of various countries regained their foothold, they quickly promoted the development of the Internet and mobile computer technology. This structural demand drove the overall demand for chips to strengthen. It is precisely because chip demand has undergone such a sudden big change in a few months, it has brought a supply bottleneck to the semiconductor industry.

In addition, the fields of personal computers and smart phones account for about 70% of total semiconductor demand, and the actual demand of the automotive industry is not paid enough attention. Automobile and electronic product manufacturers that had slashed production in the early stages of the outbreak are now rapidly re-increasing orders, but chips are still facing a full range of shortages. This is mainly due to the high dependence of the entire industry on a few Asian companies such as TSMC.

Recently, production in India and Southeast Asian countries has been severely disrupted by the epidemic. From the perspective of the overall international environment, regional epidemics, especially those in Southeast Asian countries, have a great impact on supply guarantees in the third quarter. Infineon’s packaging and testing plant in Malacca was closed for two months, which directly affected the delivery of ESP (Electronic Stability Program) products such as Bosch and Continental, and affected the production of major automakers such as German, Japanese, and independent automakers. However, the market’s confidence in the fourth quarter, the delayed delivery of orders in the third quarter, and the demand for additional purchases and exchanges brought about by the early epidemic disaster will all form a certain support for the terminal.

The performance of car companies under chip shortage is different

In 2021, the promotion rhythm of the auto market will change significantly. Beginning in May 2021, the normalized trend of increased sales promotion has reversed to shrinking sales promotion. The decline in sales promotion in July 2021 is particularly pronounced. Reducing sales promotion has gradually become a common choice for all car companies, and dealers have benefited from this. At the same time, the average sales price of the auto market has increased significantly, but this mainly refers to traditional fuel vehicles, and does not include new energy vehicles, which can be attributed to the increase in production of high-end models under the shortage of chips.

In terms of sales volume, the loss of global car sales in the first half of 2021 is not significant. However, affected by the epidemic, some automakers are trying to maximize the value of production by selling cars with the highest profit margins. However, considering the extent of the impact of tight supply, this approach is tantamount to “removing the east wall to supplement the west.” “Wall” has also led to structural adjustments in the production and sales of many auto company groups. In addition, some auto companies have differentiated treatment in terms of resource supply in different regions.

New energy usher in new opportunities in the chip “crisis”

Under the shortage of chips, the advantages of independent brands are fully demonstrated. According to data from the Passenger Association, in July 2021, the domestic retail penetration rate of new energy vehicles was 14.8%; from January to July, the penetration rate was 10.9%, a significant increase from the 5.8% penetration rate in 2020. Among them, in July 2021, the penetration rate of new energy vehicles among independent brands was as high as 30.1%, and the penetration rate of new energy vehicles among luxury cars was 8%; while the penetration rate of new energy vehicles among mainstream joint venture brands was only 2.5%.

The “core shortage” June gave independent brands a short-term opportunity to catch up with and surpass the sales of joint venture brands. In this storm caused by the lack of cores, the unique advantages of China’s independent brand supply system have been revealed. As in the process of chip resource allocation, international car companies must consider not only the Chinese market, but also the global market. The chip resources of independent brands are mainly used in the Chinese market, and sales performance will undoubtedly be better. Moreover, the importance of global parts giants on the Chinese market also gives independent brands and joint venture brands the same opportunities in the supply of key parts, which lays a solid foundation for independent brands to increase sales. The strength of domestic chips also gives independent brands more flexible choices.

The risk of chip shortage is controllable

The core demand for global semiconductor chips is electronic consumer products, but this market is in a severe downturn. After years of development, smart phones have entered a relatively mature stage. Judging from the trend of global smartphone shipments, demand for mobile phones has continued to decline in recent years. At the same time, upstream supplier companies are gradually meeting market demand. TSMC, UMC, Power Semiconductor Manufacturing and other foundries are increasing the output of related chips to prepare for the boom in automotive demand for electronic components. A few days ago, in response to prominent problems such as the auto chip market hype and high prices, the State Administration of Market Supervision filed an investigation on auto chip distributors suspected of driving up prices based on price monitoring and reporting clues.

Although it takes a relatively long time for semiconductor production capacity to increase on the supply side, the industry’s production capacity cannot increase significantly in the short term, especially under the influence of the epidemic and some natural disasters. However, due to the backwardness of many automotive chip technologies, the production capacity is withdrawn, and the market recovery will inevitably lead to the recovery of withdrawn production capacity and the entry of new production capacity. Therefore, the shortage of chips is only a matter of time.

In addition, semiconductor companies have recently been planning to invest in expanding production capacity, which is another good thing. As an important town for global IDM manufacturing and packaging and testing, Southeast Asian manufacturers will also establish a response mechanism and will not allow the continued serious shortage of supply.

The improvement of chip shortage is slower than expected

From a domestic perspective, the current regional epidemic prevention and control measures have not hindered the transportation of materials. With the addition of high temperature holidays by manufacturers and equipment repair cycles, the impact on enterprise production is relatively small. We believe that the normal production and life order can be restored in the fourth quarter, and under the consumer psychology of “recognizing myself for a year of hard work”, the bulk of automobile consumption is expected to be strengthened, boosting terminal sales in the fourth quarter.

In addition, benefiting from the rich experience in epidemic prevention, production and logistics in high-risk areas have not been significantly affected, and it is expected that the production capacity of the auto market in the third quarter will not be affected. Jiangsu and Henan provinces, where the epidemic has been repeated recently, are expected to issue a series of policies to stimulate consumption after the confirmed cases have been cleared to promote market recovery.

However, affected by the spread of the epidemic in Southeast Asia, factories in Malaysia and other places have closed, and the risk of shortage of new energy chips has increased. Therefore, it was originally expected that the problem of chip shortages would improve in July, but the market is now more confident that the problem of chip shortages in September or the fourth quarter can be improved.

Chinese car companies need to build a strong independent and controllable industrial chain

In order to actively respond to the shortage of automotive chip supply, Chinese car companies should pay attention to the following two aspects:

First, consolidate the independent industrial chain. It is necessary to strengthen the top-level design of the automobile industry, consolidate the industrial foundation, increase the opening up, and forge an independent, controllable and open industrial chain and supply chain in an all-round and multi-level manner. Building an independent and controllable modern industrial system is the only way for China’s auto industry to become bigger and stronger, and it is necessary to strengthen the chain and supplement the chain effectively.

To achieve the above goals, it is necessary to focus on key connotations and links such as independence, controllability, and modernity, pay more attention to basic research and original innovation, pay more attention to promoting the organic combination of innovation chain and industrial chain, and pay more attention to the modernization of traditional industries and their strategic emerging Industry interaction and integration to achieve better coordinated development.

Secondly, it is necessary to strengthen the industrial structure where the entire vehicle is king. To make auto companies become the core resource controllers of the industry, it is necessary to have a global supply chain thinking, and at the same time, to address the weak links of the industry, implement key core technology research, and coordinate to solve a batch of “stuck neck” problems as soon as possible. Relying on China’s superior links and fields, we should promote the formation of a highly dependent and closely coordinated relationship between the upstream and downstream of the supply chain with technology-leading countries, forming a correlation that benefits both from cooperation and hurts both by division. At the same time, it is necessary to speed up the research and development of alternative products or technologies, complement the “stuck neck” shortcomings, and ensure the independent supply of key strategic products.

 

 

 

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How the Shortage of Chips is Affecting China - /10

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The shortage of computer chips is causing production downtime worldwide. China in particular is feeling the consequences. The trigger of the shortage is the rivalry with the USA - but also hamster purchases by Chinese companies.

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