(Bloomberg) — As sophisticated semiconductor makers in the U.S. and allied countries pull out of China, a less glamorous sector of the chip market is turning even more toward the world’s second-largest economy.
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This season’s results show how important China is to the biggest players in automotive chipmaking, at a time when sales are falling due to inventory overstocks and a slowing adoption of electric vehicles in the West – a key demand driver.
Over the past two weeks, Kurt Sievers, chief executive of NXP Semiconductors NV, contrasted weakness in industrial markets in Europe and the Americas with the “stunning growth” of electric vehicle sales in China this year. Jochen Hanebeck, chief executive of Infineon Technologies AG, said China’s resilience has helped the German chipmaker’s profit, even if a broader recovery from the electric vehicle slump is still elusive. At Texas Instruments Inc., China business has risen by as much as 20% in all five of its product markets.
Deepening relations with China could prove a double-edged sword for these chipmakers, as geopolitical tensions are reaching the automotive sector. The European Union and the US have imposed tariffs on Chinese electric car imports and Beijing is threatening to respond. Now even the shipments of mature, so-called legacy chips are under scrutiny in Washington and Brussels.
Tensions between the US and China on technology issues have so far focused on Washington’s efforts to limit Beijing’s access to cutting-edge semiconductors and their manufacturing facilities. This has prompted China to increase its technological self-sufficiency, particularly in chips for the automotive industry. Since these do not depend on the latest manufacturing processes and are largely unaffected by US export controls, there is little to stop China from pushing ahead with their development and displacing foreign chipmakers.
“Just as a strong automotive industry in the EU has supported European market leaders in automotive chips such as Infineon, NXP and STMicroelectronics, the world-leading expansion of China’s electric vehicle industry is encouraging the development of Chinese suppliers of such chips,” wrote researchers John Lee and Jan-Peter Kleinhans in a recent report for the German Council on Foreign Relations. This is helping Chinese automakers become more competitive, “with potentially major implications for European companies and economies,” they said.
Auto chips, a market McKinsey predicts will be worth $150 billion by 2030, are one area of the semiconductor industry where Europe is above average. The boom is due to increasingly sophisticated technologies that are turning cars, and especially electric vehicles, into computers on wheels. Climate control, infotainment, autonomous driving and safety features are now entirely dependent on the tiny electronic components.
China is both the largest producer and market for electric vehicles: Shenzhen-based BYD Co. reported record deliveries of 340,800 cars in July, up 31 percent from the same month last year. But Chinese manufacturers rely heavily on foreign companies to produce the many chips that modern high-end cars need, including sensors, power chips to regulate the flow of electricity and microcontroller units (MCUs), basically small computers used for functions such as braking.
According to Lee and Kleinhans, China’s automotive chipmakers can currently only meet about 10 percent of domestic demand. That’s a boon for Infineon, NXP and the French-Italian group STMicroelectronics NV, which each generate about a third of their sales in China. For Renesas Electronics Corp. of Japan and Texas Instruments, two of the other major players, the figures are about 25 percent and 20 percent respectively.
The Chinese government has urged electric car makers such as BYD and Nio to buy more from local auto chip makers. Most new chip factories being built in China are for the automotive industry. As a result, the European Commission is raising concerns that chip makers in China could lose significant market share, Bloomberg News reported in June.
While quarterly results are not usually broken down by region, this season’s investor presentations provide insight into how important China is to European chipmakers, especially in these difficult times: Shares in Tokyo-based Renesas posted their biggest drop in more than 15 years on July 25 after the group’s operating results were disappointing.
On August 5, Infineon’s Hanebeck reported disappointing third-quarter sales, citing “lukewarm” demand in Western markets. He highlighted China as a bright spot, where they are experiencing “healthy consumer demand,” “which is particularly helpful to us because we are number 1 in the automotive market there.”
While STMicro cut its revenue forecast, marking the biggest drop in its stock in four years, it highlighted the upside potential of a long-term agreement announced in June with Chinese automaker Geely Automobile Holdings Ltd. to supply the company with silicon carbide power devices for electric vehicles and to set up a joint laboratory “for knowledge sharing and research into innovative solutions.”
This follows a joint venture announced last year with Sanan Optoelectronics to produce silicon carbide components in China. Germany’s Robert Bosch GmbH, another auto chip maker, meanwhile signed a 10-year, $1 billion deal to develop silicon carbide power modules in Suzhou, China. Also last year, Volkswagen AG announced a joint venture with China-based autonomous driving chip developer Horizon Robotics.
“European auto chip makers appear to be following the example of German automakers and deepening their partnerships with Chinese companies as a hedge for the Chinese market,” said researchers at the Rhodium Group led by Reva Goujon in a report published in May.
The question is whether the EU or the US is willing to take action against China’s ability to produce its own automotive chips. In April, the EU-US Trade and Technology Council expressed concerns about China’s “non-market policies and practices” that could lead to excessive dependence on scrap chips, and said it could develop “joint or cooperative measures” to avoid distortive effects.
Goujon, on the other hand, believes that because of Europe’s joint ventures with China – which she describes as “interlocks” – it is less likely that countries like Germany “would support economic security measures that entail the settlement of transactions with China – unless they were already losing significant market share, sales and jobs in the Chinese market and had little left to lose.”
Of course, chip manufacturers are aware of these dangers, but at least to the public, they are of varying degrees of concern.
“We all know that local competition from China is coming,” NXP’s Sievers said on July 23, starting with “low-end” MCUs. His response is to push his company’s development toward more powerful processors.
China’s attempts to localize its chip supply will be “a slow process because foreign chipmakers still offer quality and reliability,” which are important assets, especially in the automotive market, said Ken Hui, a senior technology analyst at Bloomberg Intelligence.
Given that China is increasing its chip manufacturing capacity more than the rest of the world combined, it may only be a matter of time before it catches up.
Texas Instruments CEO Haviv Ilan sounds anything but optimistic about China. Although he said on July 24 that “we are competitive and can win orders,” he acknowledged that competition is getting tougher.
“I think it’s a mistake for us to think that these guys are just doing, well, simple tasks,” he said. “These are very ambitious, highly educated participants.”
– With support from Debby Wu, Ian King and Craig Trudell.
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