Chips in car manufacturing Threatened by boycotts from the USA and the EU, China is increasingly relying on "Made in China"

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The Chinese government is encouraging car manufacturers to strengthen the domestic supply chain. Therefore, they should increasingly rely on domestic chips. However, this is just one strategy pursued by the People's Republic.

Henrik Bork, long-time China correspondent for the Süddeutsche Zeitung and the Frankfurter Rundschau, is Managing Director at Asia Waypoint, a Beijing-based consulting agency specializing in China.

China has urged its car manufacturers to use more Chinese chips. Already next year, ideally "20 to 25 percent" of all car chips should be purchased from Chinese chip producers, says a new directive from the Chinese Ministry of Industry and Information Technology MIIT. This is reported by the Japanese business newspaper Nikkei Asia, citing car managers in China.

Currently, foreign chip manufacturers such as Infineon, NXP Semiconductors, or Renesas still dominate the Chinese market for car chips by an overwhelming majority. Only about 10 percent of all car chips for cars produced in China have so far come from domestic Chinese manufacturers.

However, the Chinese government's new localization initiative already sets the goal for 2025 to more than double the share of domestic car chips. "The goal is ambitious - maybe only locally produced chips will be used for cars," the Japanese business newspaper quotes an unnamed source in China.

No legal basis

The call to use significantly more "made in China" chips has been communicated to Chinese carmakers including BYD, SAIC Motor, Dongfeng, GAC, and the FAW Group, among others. However, implementation is not legally required, Nikkei Asia writes.

Instead, Chinese car manufacturers are being offered "incentives" if they buy as much as possible on the domestic chip market. There will be a "reward or credit system" for patriotically pleasing semiconductor orders, according to the report.

China's desire to gradually climb higher in the industrial value chain, from the cheap "workbench of the world" to a high-tech nation, is not new. As early as 2015, the "Made in China 2025" plan was published, with exactly this goal for many sectors of the manufacturing industry. Among other things, China had drawn inspiration from the German "Industry 4.0" plan, which dates back to 2013.

Threatening anti-subsidy initiative

Since former US President Donald Trump tried to thwart China's industrial modernization plan with boycotts for advanced semiconductors and equipment for their foundries, the Communist leadership in Beijing has significantly accelerated its efforts to build its own semiconductor supply chains.

At least in the case of auto chips, which are largely based on more mature processes and are not as difficult to manufacture as the most advanced AI chips, the People's Republic has already made great progress in the past few years.

Also important to understand the new haste in Beijing to replace foreign manufacturers of automotive semiconductors in stages with domestic ones are the new sanction threats from the European Union. The EU Commission has started an "anti-subsidy investigation" against several Chinese manufacturers of electric cars, including the market leader BYD.

It is expected that the EU will impose tariffs on Chinese electric cars this summer to protect the European market from competition from the Far East. Washington has recently already quadrupled its protective tariffs on Chinese electric cars to more than 100 percent.

In the face of these semiconductor and trade wars, Beijing is now striving to make its supply chains increasingly independent of foreign semiconductors and other high tech. Every year, more than 30 million cars are sold in China, but so far domestic semiconductor companies supply only ten percent of all auto chips, as mentioned earlier. This is not a healthy ratio from a Chinese perspective.

The journey is the destination

As always, the Chinese government is very systematic and long-term in pursuing such industrial policy objectives. Not individual products are localized, but complete supply chains. Thus, Chinese chip manufacturers like the Semiconductor Manufacturing International Corp. (SMIC) and ChangXin Memory Technologies (CXMT) have also already begun to switch their sourcing of important materials for their own chip production from foreign to domestic suppliers.

Since last year, foreign suppliers of wafers as well as hundreds of chemicals and specialty gases for chip production are being replaced by companies producing in China wherever possible.

Where it sees a need to catch up, China continues to rely on partnerships with foreign companies. For example, Xiaomi, the mobile phone manufacturer with ambitions in the field of electric cars, has just signed a long-term supply contract for control chips fro, Infineon. 

Beijing also allows foreign chip manufacturers and Tier-1 suppliers such as Bosch or Continental to build new factories for automotive chips and other electronic components for the automotive market in China. German suppliers to the automotive industry in particular are very active in this area in the People's Republic and are placing strong emphasis on the electrification of their product portfolios.

Partial independence

Apparently, although China is aiming for greater independence from car chips produced abroad, it does not want to exclude foreign chip manufacturers from production and lucrative business on site in China. This subtle difference could be important for the share prices of Infineon, Renesas and possibly Bosch in the future.

On the other hand, Chinese policy is not limited to localization requirements, but actively promotes investments in the establishment of domestic, Chinese-dominated supply chains. An example is the vertical integration in the industry, where local chip manufacturers, like SMEC, as well as Chinese car and battery manufacturers establish new joint ventures, e.g. for the production of the increasingly popular SiC chips in electric cars. (sb)