(Bloomberg) — As advanced semiconductor companies in the U.S. and neighboring countries pull back from China, a less glamorous sector of the chip market is increasingly turning to the world's second-largest economy.
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This season's earnings figures show how important China is to the biggest players in auto chip production, especially as sales suffer from a glut of inventory and slowing adoption of electric vehicles in the West, a key driver of demand.
Over the past two weeks, Kurt Sievers, CEO of NXP Semiconductors NV, contrasted weakness in industrial markets in Europe and the U.S. with the “staggering growth” of EV sales in China this year. Infineon Technologies AG CEO Jochen Hanebeck said China’s resilience helped the German chipmaker’s profits even as a broader recovery from the EV slump remains elusive. For Texas Instruments Inc., China business has risen as much as 20 percent across all five product markets.
Deepening their engagement with China could prove to be a double-edged sword for these chipmakers as geopolitical tensions spill over into the auto sector. The European Union and the U.S. have imposed tariffs on Chinese EV imports, and Beijing is threatening a response. Now even supplies of mature, so-called legacy chips are coming under scrutiny in Washington and Brussels.
Tensions between the U.S. and China over technology have so far focused on Washington’s efforts to restrict Beijing’s access to advanced semiconductors and the equipment used to make them. That has fueled a Chinese push to build technological self-reliance, particularly in automotive chips. Because these don’t rely on the latest manufacturing processes and are largely untouched by U.S. export controls, there’s little to stop China from ramping up development and eventually crowding out foreign chipmakers.
“Just as a strong EU auto industry has supported European leaders in automotive chips such as Infineon, NXP and STMicroelectronics, the world-leading expansion of China’s EV industry is fueling the development of Chinese suppliers of such chips,” researchers John Lee and Jan-Peter Kleinhans wrote in a recent report for the German Council on Foreign Relations. That’s helping Chinese automakers become more competitive, “with potentially major implications for European companies and national economies,” they said.
Automotive chips, a market that McKinsey predicts will be worth $150 billion by 2030, is one area of the semiconductor industry where Europe is punching above its weight. The expansion is driven by increasingly sophisticated technology that is turning cars, particularly electric vehicles, into computers on wheels, with climate control, infotainment, self-driving and safety features that now rely entirely on the tiny electronic components.
China is both the world’s largest producer and market for electric vehicles: Shenzhen-based BYD Co. reported deliveries of a record 340,800 passenger vehicles in July, up 31 percent from the same month last year. Still, Chinese manufacturers rely primarily on foreign companies for the myriad of chips that modern high-end cars require, including sensors, power chips for regulating power and microcontroller units, or MCUs, which are essentially tiny computers used for functions like braking.
According to Lee and Kleinhans, Chinese auto chipmakers can currently meet only 10 percent of domestic demand. That's a boon for Infineon, NXP and Franco-Italian conglomerate STMicroelectronics NV, which each get about a third of their revenue from China. For Japan's Renesas Electronics Corp. and Texas Instruments, two of the other big players, it's about 25 percent and 20 percent, respectively.
The Chinese government has asked EV companies like BYD and Nio to increase their purchases from local auto chipmakers, and most new chip factories built in China are for the automotive industry. As a result, the European Commission is concerned that its chipmakers are at risk of losing substantial market share in China, Bloomberg News reported in June.
While quarterly results are not typically broken down by region, investor presentations this season do provide some insight into how important China is to European chipmakers, especially in the current challenging times: Shares of Tokyo-based Renesas fell by the most in more than 15 years on July 25 after operating profit disappointed.
Infineon's Hanebeck reported disappointing third-quarter sales on August 5, citing “tepid” demand in Western markets while pointing to China as a bright spot with “healthy consumer demand, which is particularly helpful given our No. 1 position in the automotive market there.”
STMicro cut its revenue forecast and sent its stock price down the most in four years. The company highlighted the potential benefits of a long-term agreement announced in June with China’s Geely Automobile Holdings Ltd. to supply silicon carbide devices for electric vehicles, along with a joint laboratory “to share knowledge and explore innovative solutions.”
That follows a joint venture it announced last year with Sanan Optoelectronics to produce silicon carbide devices in China. Germany’s Robert Bosch GmbH, another auto chip player, meanwhile signed a $1 billion, 10-year contract to develop silicon carbide power modules in Suzhou, China. Volkswagen AG also announced a joint venture last year with China-based autonomous driving chip developer Horizon Robotics.
“European auto chipmakers appear to be following in the footsteps of German automakers by opting to deepen partnerships with Chinese entities as an insurance policy in the Chinese market,” Rhodium Group researchers led by Reva Goujon said in a May report.
The question is whether the EU or the US is prepared to act against China's ability to produce its own auto chips. In April, the EU-US Trade and Technology Council raised concerns with China about “non-market economy policies and practices” that could lead to excessive reliance on older chips, and said they could develop “joint or cooperative measures” to address disruptive effects.
For Goujon, however, European joint ventures with China – what she calls “entanglement” – make it less likely that countries like Germany “would adopt economic safeguards that would involve the unwinding of transactions in China – unless they were already losing significant market share, revenues and jobs in the Chinese market and had little left to lose.”
Chip manufacturers are of course aware of the dangers, but in public they show their concerns to varying degrees.
“We all know that local Chinese competition is coming,” starting with “low-end” MCUs, NXP’s Sievers said July 23. His response is to push his company’s development toward higher-performance processors.
According to Ken Hui, senior technology analyst at Bloomberg Intelligence, China’s efforts to localize its chip supply “will be a slow process as foreign chipmakers still offer quality and reliability,” which are particularly important assets in the automotive market.
With China expanding more chip production capacity than the rest of the world combined, it may only be a matter of time before the country also grows as quickly as possible.
Texas Instruments CEO Haviv Ilan certainly doesn’t sound optimistic about China. Although he said on July 24 that “we can compete and win business,” he acknowledged that competition was getting fiercer.
“I think it's a mistake to think that these guys are just doing simple parts,” he said. “These are very ambitious, highly skilled competitors.”
–With assistance from Debby Wu, Ian King and Craig Trudell.
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