Auto chip shortage more severe than expected, carmakers may see more pressure in next few months

The ongoing shortage of automotive chips is more severe than expected and automakers will see more pressure in the next few months as the short supply could last for a while, said industry insiders.

“These days, how many cars you can produce is totally dependent on how many chips you can get. Auto production and sales in the next few months will be completely decided by chip supply,” said Li Shaohua, deputy secretary general at the China Association of Automobile Manufacturers (CAAM), the country’s most influential car industry body. He added that the shortage of automotive chips have been more severe than expected.

Data from the association showed that China’s car output and sales in August reached 1.73 million units and 1.799 million units, respectively, falling by 18.7 per cent and 17.8 per cent from the same period last year, sliding for the fourth consecutive month.

“Due to the impact of Covid-19 outbreaks overseas, supply chain risks are rising, adding more pressure on auto production,” said Chen Shihua, deputy secretary general of the CAAM.

In the next four months, if overseas Covid-19 outbreaks don’t get worse and production at companies in the auto supply chain accelerates, China’s car production and sales this year could rise by 2 – 4 per cent, said Chen, noting that the growth rate is unlikely to exceed 6 per cent.

The shortage will last for a while and Chinese authority will provide active support to chip makers to increase supply capability and accelerate operation of alternative options, optimize the supply chain to ensure long-term chip supply, said Tian Yulong, spokesperson of the Ministry of Industry and Information Technology this week.

The intensifying shortage is dampening the outlook for the global auto market. London-based market research firm IHS Markit estimated on Thursday that semiconductor shortages and the delayed packaging and testing of the chips will cause production of global light vehicles to drop by 6.2 per cent, or five million this year.

IHS Markit also downgraded the production forecast of global light vehicles by 9.3 percent to 82.6 million units in 2022, citing supply chain challenges.

Packaging and testing operations in the semiconductor sector in Malaysia were impacted due to the government’s lockdown measures in early June, compounding difficulties in an already constrained supply chain. “Our interpretation of the situation in Malaysia, which is responsible for 13 per cent of the global supply of semiconductors for the automotive industry, has become more pessimistic,” IHS said.

Toyota, the world’s largest automaker, recently announced that it would cut global auto production by 40 per cent in September amid a chip crunch worsened by a COVID-19 resurgence in key Asian semiconductor production hubs.

IHS said the semiconductor snafus have resulted in lost production of 3.1 million units in the third quarter, nearly double its previous forecast. “The outlook for the fourth quarter now reflects heightened risk as challenges to the supply chain – primarily semiconductors – remain entrenched.”

Amid the unprecedented chip crunch, automakers have been scrambling for chips and chip prices have been soaring.

“If there is a supply of 2,000 units of chips, high-level executives will rush for them in person. That’s how desperate they are these days,” a carmaker executive told Yuan Talks, adding that even cars for display at its stores have been sold out and going forward, its production will be completely dependent on chip supply.

“We have been searching for chips everywhere from the end of last year and now it’s getting more and more difficult to get,” another carmaker executive told Yuan Talks.

Guo Yongfeng, general manager of SAIC Volkswagen’s sales company, said last month that the company’s production had been affected for five consecutive months, with over 50 per cent of production affected in some month. “Searching for chips is becoming the top priority.”

Last week, China’s State Administration of Market Regulation fined three auto chip distributors – Shanghai Cheter, Shanghai Chengsheng Industrial, and Shenzhen Yuchang Technologies – a total of 2.5 million yuan ($387,870) for driving up prices.

The regulator launched a probe into chip hoarding in August. The three companies were found to have inflated car chip prices by as much as 40 times the purchase price, which far exceeded normal price increases of 7 to 10 per cent for car chip trading companies under balanced supply and demand, the regulator said.

It added that the drastic hike led to panic stockpiling among component manufacturers and carmakers, further aggravating the balance of supply and demand, resulting in faster price increases.

Some industry insiders say the situation is worse than what the regulator described. According to Chinese news outlet Yicai, a chip shortage after the Covid-19 stymied production at chipmakers in Malaysia has driven the black market price of Bosch’s electronic stability program chips in China surging by over 300 times.

The price has surged to about 4,000 yuan ($620) apiece, from 2,500 yuan in mid-August and 1,500 yuan at the start of August. Before the ongoing shortage, they were sold at just 13 yuan ($2) per unit.

A Bosch supplier was forced to shutter its chip plant in Muar, Malaysia on Aug. 16 due to a Covid-19 outbreak, said David Xu, executive vice president of Bosch China Investment. Various kinds of chips, including for ESP, integrated power braking, and vehicle control, would be unavailable in China for some time, he added.