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From his small office in Singapore, Kelvin Pang is ready to wager a $23 million payday that the worst of the chip shortage is not over for automakers – at least in China.

Pang has bought 62,000 microcontrollers, chips that help control a range of functions from car engines and transmissions to electric vehicle power systems and charging, which cost the original buyer $23.80 each in Germany.

He’s now looking to sell them to auto suppliers in the Chinese tech hub of Shenzhen for $375 apiece. He says he has turned down offers for $100 each, or $6.2 million for the whole bundle, which is small enough to fit in the back seat of a car and is packed for now in a warehouse in Hong Kong.

“The automakers have to eat,” Pang told Reuters. “We can afford to wait.”

The 58-year-old, who declined to say what he had paid for the microcontrollers (MCUs), makes a living trading excess electronics inventory that would otherwise be scrapped, connecting buyers in China with sellers abroad.

The global chip shortage over the past two years – caused by pandemic supply chaos combined with booming demand – has transformed what had been a high-volume, low-margin trade into one with the potential for wealth-spinning deals, he says.

Automotive chip order times remain long around the world, but brokers like Pang and thousands like him are focusing on China, which has become ground zero for a crunch that the rest of the industry is gradually moving beyond.

Globally, new orders are backed up by an average of about a year, according to a Reuters survey of 100 automotive chips produced by the five leading manufacturers.

To counter the supply squeeze, global automakers like General Motors, Ford and Nissan have moved to secure better access through a playbook that has included negotiating directly with chipmakers, paying more per part and accepting more inventory.

For China though, the outlook is bleaker, according to interviews with more than 20 people involved in the trade from automakers, suppliers and brokers to experts at China’s government-affiliated auto research institute CATARC.

Despite being the world’s largest producer of cars and leader in electric vehicles (EVs), China relies almost entirely on chips imported from Europe, the United States and Taiwan. Supply strains have been compounded by a zero-COVID lockdown in auto hub Shanghai that ended last month.

As a result, the shortage is more acute than elsewhere and threatens to curb the nation’s EV momentum, according to CATARC, the China Automotive Technology and Research Center. A fledgling domestic chipmaking industry is unlikely to be in a position to cope with demand within the next two to three years, it says.

Pang, for his part, sees China’s shortage continuing through 2023 and deems it dangerous to hold inventory after that. The one risk to that view, he says: a sharper economic slowdown that could depress demand earlier.

Forecasts ‘hardly possible’

Computer chips, or semiconductors, are used in the thousands in every conventional and electric vehicle. They help control everything from deploying airbags and automating emergency braking to entertainment systems and navigation.

The Reuters survey conducted in June took a sample of chips, produced by Infineon, Texas Instruments, NXP, STMicroelectronics and Renesas, which perform a diverse range of functions in cars.

New orders via distributors are on hold for an average lead time of 49 weeks – deep into 2023, according to the analysis, which provides a snapshot of the global shortage though not a regional breakdown. Lead times range from six to 198 weeks.

German chipmaker Infineon told Reuters it is “rigorously investing and expanding manufacturing capacities worldwide” but said shortages may last until 2023 for chips outsourced to foundries.

“Since the geopolitical and macroeconomic situation has deteriorated in recent months, reliable assessments regarding the end of the present shortages are hardly possible right now,” Infineon said in a statement.

Taiwan chipmaker United Microelectronics told Reuters it has been able to reallocate some capacity to auto chips due to weaker demand in other segments. “On the whole, it is still challenging for us to meet the aggregate demand from customers,” the company said.

TrendForce analyst Galen Tseng told Reuters that if auto suppliers needed 100 PMIC chips – which regulate voltage from the battery to more than 100 applications in an average car – they were currently only getting around 80.

Urgently seeking chips

The tight supply conditions in China contrast with the improved supply outlook for global automakers. Volkswagen, for example, said in late June it expected chip shortages to ease in the second half of the year.

The chairman of Chinese EV maker Nio, William Li, said last month it was hard to predict which chips would be in short supply. Nio regularly updates its “risky chip list” to avoid shortages of any of the more than 1,000 chips needed to run production.

In late May, Chinese EV maker Xpeng Motors pleaded for chips with an online video featuring a Pokemon toy that had also sold out in China. The bobbing duck-like character waves two signs: “urgently seeking” and “chips.”

“As the car supply chain gradually recovers, this video captures our supply-chain team’s current condition,” Xpeng CEO He Xiaopeng posted on Weibo, saying his company was struggling to secure “cheap chips” needed to build cars.

All roads lead to Shenzhen

The scramble for workarounds has led automakers and suppliers to China’s main chip trading hub of Shenzhen and the “gray market,” brokered supplies legally sold but not authorized by the original manufacturer, according to two people familiar with the trade at a Chinese EV maker and an auto supplier.

The gray market carries risks because chips are sometimes recycled, improperly labeled, or stored in conditions that leave them damaged.

“Brokers are very dangerous,” said Masatsune Yamaji, research director at Gartner, adding that their prices were 10 to 20 times higher. “But in the current situation, many chip buyers need to depend on the brokers because the authorized supply chain cannot support the customers, especially the small customers in automotive or industrial electronics.”

Pang said many Shenzhen brokers were newcomers drawn by the spike in prices but unfamiliar with the technology they were buying and selling. “They only know the part number. I ask them: Do you know what this does in the car? They have no idea.”

While the volume held by brokers is hard to quantify, analysts say it is far from enough to meet demand.

“It’s not like all the chips are somewhere hidden and you just need to bring them to the market,” said Ondrej Burkacky, senior partner at McKinsey.

When supply normalizes, there may be an asset bubble in the inventories of unsold chips sitting in Shenzhen, analysts and brokers cautioned.

“We can’t hold on for too long, but the automakers can’t hold on either,” Pang said.

Chinese self-sufficiency

China, where advanced chip design and manufacturing still lag overseas rivals, is investing to decrease its reliance on foreign chips. But that will not be easy, especially given the stringent requirements for auto-grade chips.

MCUs make up about 30% of the total chip costs in a car, but they are also the hardest category for China to achieve self-sufficiency in, said Li Xudong, senior manager at CATARC, adding that domestic players had only entered the lower end of the market with chips used in air conditioning and seating controls.

“I don’t think the problem can be solved in two to three years,” CATARC chief engineer Huang Yonghe said in May. “We are relying on other countries, with 95% of the wafers imported.”

Chinese EV maker BYD, which has started to design and manufacture IGBT transistor chips, is emerging as a domestic alternative, CATARC’s Li said.

“For a long time, China has seen its inability to be totally independent on chip production as a major security weakness,” said Victor Shih, professor of political science at the University of California, San Diego.

With time, China could build a strong domestic industry as it did when it identified battery production as a national priority, Shih added.

“It led to a lot of waste, a lot of failures, but then it also led to two or three giants that now dominate the global market.”
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The Senate this week took a key step toward passing a bill meant to provide $52 billion in subsidies to the semiconductor industry in the United States, part of an effort that lawmakers have characterized as protecting the country from supply shortages such as those that struck during the coronavirus pandemic.

The bill, called the CHIPS for America Act, also seeks to make the U.S. more competitive with China.

Semiconductors, commonly known as chips, are essential elements of modern manufacturing. They are used in computers, cellphones and automobiles as well as in various other capacities. During the pandemic, chip shortages slowed manufacturing in multiple industries to a crawl.

The legislation would create incentives for semiconductor manufacturers to build chip fabrication plants in the U.S. to bring back domestic production levels, which have fallen from more than one-third of total global capacity three decades ago to less than 12% now.

Discussing the legislation on the Senate floor, Senator Rob Portman, a Republican, said, “It is a plan to make America more competitive with China, and a plan to bring good jobs back to America.”

In a 64-34 procedural vote Tuesday, with more than a dozen Republicans voting with the overwhelming majority of Democrats, the Senate cleared the way for the legislation to come to a vote as soon as this week. The House of Representatives would need to pass the bill — which is still not in its final form — before President Joe Biden could sign it into law.

Making the case

Before the vote Tuesday, Senate Majority Leader Chuck Schumer told his colleagues that the bill “will fight inflation, boost American manufacturing, ease our supply chains and protect American security interests.”

He added: “America will fall behind in so many areas if we don’t pass this bill, and we could very well lose our ranking as the No. 1 economy and innovator in the world if we can’t pass this.”

Senator John Cornyn, the most senior Republican to vote in favor of advancing the bill, used Twitter to make his case ahead of the vote.

“If the US lost access to advanced semiconductors (none made in US) in the first year, GDP could shrink by 3.2 percent and we could lose 2.4 million jobs,” he tweeted. “The GDP loss would 3X larger ($718 B) than the estimated $240 B of US GDP lost in 2021 due to the ongoing chip shortage.”

The money in the bill comes with significant strings attached. Companies accepting the subsidies must agree not to use the funds for to buy back stock, pay shareholder dividends, or expand manufacturing in certain countries identified in the bill. Provisions allow the government to “claw back” the funds if a recipient violates any of the bill’s conditions.

Second try

If the bill advances to the House, it would mark the second time a bipartisan group of senators tried to secure money for the semiconductor industry. Last year, the Senate passed a $250 billion package that included broader research and development funding.

When the House received the bill, it waited nearly a year to pass its own version and made a number of additions that Senate Republicans would not agree to. The bill never advanced.

Now, however, things might be different. In a letter circulated to members of the House Democratic caucus on Wednesday, House Speaker Nancy Pelosi wrote in favor of the bill.

“With this package, the United States returns to its status as a world leader in the manufacturing of semiconductor chips,” Pelosi wrote, noting that the bill would create an estimated 100,000 well-paid government contracting jobs in the industry.

“Doing so is an economic necessity to lower costs for consumers and to win in the 21st Century Economy, as well as a national security imperative as we seek to reduce our dependence on foreign manufacturers,” Pelosi wrote.

Industry reacts

In an email exchange with VOA, Ajit Manocha, president and CEO of Semi, a global industry trade group, said, “We are pleased to see action to reverse the decline in the U.S. share of global semiconductor manufacturing capacity, which has fallen by 50 percent in the last 20 years and is forecast to shrink further.”

“The availability of robust incentives in other countries and the lack of a federal U.S. incentive have been key factors driving the location of more overseas manufacturing facilities,” Manocha added. “If the United States wants to maintain or increase its share of global semiconductor manufacturing capacity, the federal government absolutely needs to get in the game.”

Semiconductor Industry Association President and CEO John Neuffer said in a statement, “The Senate CHIPS Act would greatly strengthen America’s economy, national security, and leadership in the technologies that will determine our future.”

He added, “This is America’s window of opportunity to re-invigorate chip manufacturing, design, and research on U.S. shores, and Congress should seize it before the window slams shut.” 
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