China auto industry recovery faces challenges from Europe chip shortage

China’s automotive production will have to hurdle through a shortage of electronic chips from Europe well into 2021, which could derail the industry’s fragile recovery amid the pandemic.

“It’s hard to say how long the imbalance in supply and demand will last, but one thing for sure is that the situation could turn very severe in the first quarter of next year and affect some carmakers heavily,” said Li Shaohua, deputy secretary general and head of industry development at the China Association of Automotive Manufacturers (CAAM).

Nonetheless, the overall impact on the country’s overall industry for the whole of next year would be limited, Li said.

In short supply are mainly the electronic control unit (ECU) and microcontroller unit (MCU) from key European producers such as Dutch-based NXP Semiconductors and German firms Continental and Bosch, as the spike in demand in China since the second quarter from a pandemic-induced slump took most chip suppliers by surprise.

The world's biggest car market has been rebounding well, with both production and sales on their seventh consecutive month of expansion in October after slumping for nearly two years, according to industry data.

Production growth from April-October has averaged 13.8%, while sales increased at an average of 12.0% over the same period, CAAM data showed.

Supply tightness for the chips has appeared as early as August and September but got worse in December, said a source with knowledge of Chinese operations at Japan’s giant automaker Toyota.

The shortage is just felt more in China given its massive requirement for production, which has recovered much earlier compared with other countries post-lockdown, the source said.

Amid scarce supply, the prices of some of these chips consequently spiked, said a source at Sino-Japan carmaking joint venture GAC [Guangzhou Automobile Co]-Toyota. This effectively raises the cost of producing a car.

German auto giant Volkswagen, which holds nearly a fifth market share in China, flagged the issue on semiconductor shortage which could disrupt its own production.

The company has yet to reply to ICIS query regarding the issue.

German auto parts supplier Continental pointed to the rebound in Chinese demand as the main cause of the semiconductor shortage, which may cause supply-chain bottlenecks until 2021.

“Although semiconductor manufacturers have already responded to the unexpected demand with capacity expansions, the required additional volumes will only be available in six to nine months,” Continental said in a statement.

“The potential delivery bottlenecks may last into 2021,” it added.

ASIA AN ALTERNATIVE CHIP SOURCE

To relieve the shortage, China could turn to the region’s own semiconductor powerhouses in Japan, South Korea, Singapore on the strength of the newly minted Regional and Comprehensive Economic Cooperation Partnership (RCEP).

Producing chips for the automotive industry may be the next chapter for semiconductor manufacturers as more automakers beef up electric vehicle production in response to growing demand.

The chip-making industry could not keep up with the strong demand as more car companies are introducing Advanced Driver Assistance Systems (ADAS), as well as eletric/hybrid cars, said a US-based industry source.

“There are other semiconductor or chips suppliers in Japan, Singapore, South Korea and Taiwan - so the impact of the disruption in chips supply from Germany on China’s automotive production will not be significant,” a rubber trader said.

The RCEP signed in mid-November 2020 is a free trade agreement (FTA) among 15 member countries led by China. The 10-nation ASEAN, as well as Japan, South Korea, Australia and New Zealand are signatories to the deal.

It marks the first time Japan - the world’s third-biggest economy - to have a free trade deal with China, allowing it deeper access into the giant emerging market.

CHINA CAR INVENTORIES AMPLE

Car dealers in China currently have enough inventories to be too worried about production bottlenecks being caused by the shortage of chips, industry sources said.

“Car inventories are still ample and it is a good time for dealers to destock,” a Guangzhou-based car dealer said.

Vehicle sales in China typically peaks for about two months from December until the week-long Lunar New Year holiday, which falls in February 2021.

Prior to the rebound in April 2020, car production in China shrank 80% year on year in February, followed by another 45% decline in March, as the country resorted to strict lockdown to stop a coronavirus outbreak believed to have originated in Wuhan in late 2019.

The local industry was also coming from nearly two years of slump, which followed decades of fast growth.

On a global scale, recovery in automotive demand is expected to be weak as coronavirus infections continued to spike although hopes are pinned on availability of a vaccine soon.

As of 8 December, the global tally of infections stood at 67.2m, with the death toll at more than 1.5m, according to data from the World Health Organization (WHO).