By Liza Lin and Raffaele Huang
SINGAPORE -- China isn't satisfied with becoming the world's dominant maker of electric vehicles. It wants the chips inside to be Chinese-made too.
Not long ago, almost all the chips in Chinese cars relied on manufacturing by the likes of Texas Instruments and Germany's Infineon. Today, the use of homemade chips has risen to around 15%, say people involved in the industry, and it is poised to rise further.
Last week, the U.S. opened an investigation into China's production of chips made with mature technology that are often used in areas such as autos and defense. U.S. Trade Representative Katherine Tai said there was evidence China used "extensive anticompetitive and non-market means" to achieve self-sufficiency, and the Commerce Department has said subsidized low-cost Chinese chip makers might flood the global market and drive down prices.
Beijing is making little secret of its industrial policy, reasoning that controlling the brains inside the world's most important consumer product is too important to be left to market forces. It is setting targets for homegrown chips and supporting domestic chip makers through state semiconductor funds including a $47 billion one started in May.
Foreign companies in the car-chip business, which has annual revenue of more than $80 billion, face a choice of producing more in China or losing sales. Many are choosing the former, upending the lean and efficient global supply chain for chips.
"If the world wants to decouple, you can do China for China and non-China for non-China," said Texas Instruments' chief executive, Haviv Ilan, at a December investor briefing. "If the world stays open, and I hope it will, you can continue to have this diverse supply chain."
The U.S. and Europe are also promoting domestic semiconductor production. A 2022 U.S. law passed under President Biden is funding tens of billions of dollars in subsidies.
Industry executives said many of the integrated circuits China produces for vehicles are low-end commodity chips, and it is years away from complete self-sufficiency. Even so, China's progress shows how it can make strides in producing items for which it previously relied on the U.S., Europe and Japan.
"It is very foolish to underestimate the ability of the Chinese to be competitive," said Handel Jones, founder of consulting firm International Business Strategies, who has worked with Chinese chip companies. "To get the automotive market in China, the strategy has to be: designed and made in China for the China market."
Semiconductors have become one of the main battlegrounds in the U.S.-China tech rivalry, for both commercial and national-security reasons. In recent weeks, the two nations have engaged in a tit-for-tat bout of sanctions over high-end chips and raw materials.
The rise of Chinese auto chips doesn't stem solely from government fiat. The concentration of the world's biggest EV-manufacturing industry in China acts as a gravitational force for anyone who makes EV parts.
Today's gasoline-engine cars often contain more than 700 chips to power automatic doors, run entertainment systems and control the brakes, among many other tasks, and EVs need more than twice that number. Typically those chips use mature or "legacy" technology.
Semiconductors used in automotive applications accounted for about 15% of the $530 billion semiconductor market in 2023, up from 8% in 2020, according to researcher Gartner. In addition to longstanding U.S., European and Japanese makers, Qualcomm and Nvidia have entered the market with an eye on autonomous driving systems.
U.S. curbs on exports of chips to China generally don't hit legacy chips. But Beijing still prefers self-sufficiency. China was the world's biggest buyer of semiconductor-making equipment in 2024, snapping up machines able to produce these commodity chips.
China's state-backed automobile association earlier this month cautioned companies against buying American processors, calling them unsafe and unreliable, the first time it had issued such a message publicly.
Earlier in 2024, officials from China's Ministry of Industry and Information Technology asked major carmakers to report every quarter how many locally made chips they bought, according to people briefed on the matter.
China leads the world in the rollout of electric and plug-in hybrid vehicles. About half of the 20 million vehicles sold in China in 2024 through November fell into one of those two categories.
That gives local semiconductor makers an opportunity. A government-backed automotive chip association, founded in 2020, took out a booth at China's premier car exhibition in April for the first time and showcased dozens of China-made processors.
Chinese automakers say they prefer to source locally to ensure steady supply. Some also find it easier to work with chip designers at home who can move quickly and are more willing to make customized products. This is critical because Chinese carmakers are accustomed to refreshing their EV lineups frequently like smartphones, rather than like gasoline cars updated every five years or so.
The first Chinese chips to gain share are analog and power semiconductors controlling simpler parts such as windshield wipers. As more advanced locally produced semiconductors are tested and qualified, analysts say Western rivals will begin to feel the squeeze.
Beijing-based Horizon Robotics, a rival to Nvidia and Qualcomm in car chips, said it had 25 automaker customers as of June 2024, up from 14 in 2021. Horizon said domestic suppliers could "better cater to the demand and preference of the Chinese customers."
A teardown by researchers at UBS in 2023 found that all of the power semiconductors in the BYD Seal, a popular sedan in China, came from Chinese suppliers.
In September, Wilmington, Mass.-based Analog Devices said it lost some market share in 2023 owing to China's push for indigenous chips but conditions stabilized in 2024. "It is still a growth market, but we're unsure if it's the fastest growth market going forward," said Michael Lucarelli, the company's vice president for investor relations.
For now, Western players are trying to keep their edge in China. Switzerland-based STMicroelectronics formed a joint venture to produce chips for cars and industrial power sectors with a state-linked company in 2023, while Dutch chip maker NXP said in November it wanted to localize production of processors for Chinese automakers.
Chief Executive Kurt Sievers said the market has turned upside down from the days when Western carmakers were NXP's lead customers and the company would sell the resulting products to Chinese customers.
Now, with Chinese carmakers leading in self-driving vehicles and electrification, "we start to use them and leverage them as lead customers and eventually sell them to the West," Sievers said.
Write to Liza Lin at liza.lin@wsj.com and Raffaele Huang at raffaele.huang@wsj.com
(END) Dow Jones Newswires
December 30, 2024 23:00 ET (04:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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