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China's Chip Profiteers Should Be Worried
Chen Yudong, the head of Bosch in China, started his speech at a forum in April with an apology aimed at automakers. Chen said the supplier had tried its very best to make more semiconductors but, just couldn’t churn out enough for everybody. He was sincere, though Bosch isn’t really the party at fault (even if Elon Musk would beg to differ). To the contrary, the companies in China that have made the chip shortage even worse by hoarding and inflating prices have remained silent. They may soon face the consequences.
Hoarding materials for profit is no strange phenomena in Asia’s biggest economy. There are numerous examples of goods being sold online for vastly elevated prices. In the car-chips world, some industry insiders told me that the average price of auto chips has soared by between 10 and 20 times, yet they’re still hard to get.
The global chip shortage that started at the end of last year is expected to cut car sales by around 3.9 million units in 2021. Carmakers are living in persistent panic due to the likelihood that an absence of any single kind of tiny semiconductor could lead to a production stoppage, particularly considering smart cars use some 1,700 chips. In extreme circumstances, automakers have had to make the cars without those precious components and store them, waiting for the chips to be delivered for the final touch. Another strategy has been to prioritize higher-margin vehicles and make those with what chips are available.
From Horsepower to Chip Power
Modern cars are relying more on electronics that include semiconductors
Source: IHS, Deloitte analysis
Note: Forecasts as of April 2019.
Who are these profiteers lining their pockets? Fingers are mainly pointing at chip dealers that have been sucking up stock to charge higher prices. In a commentary earlier this month, broadcaster CCTV said that some auto-chip distributors have “maliciously” pushed up prices and urged sellers to be disciplined and refrain from hoarding components. While these middlemen are making insane profits, automakers and their suppliers are having to idle assembly lines and send workers home.
The soaring prices have caught the attention of authorities. The State Administration for Market Regulation has launched a probe into possible price manipulation and vowed to punish any companies found to be hoarding chips or raising prices through collusion.
Automakers applauded the move with Ye Shengji, a vice secretary general of the China Association of Automobile Manufacturers, telling me that “government agencies and industry associations should try various channels to stabilize car-chip prices and put an end to vicious bidding and other problems.”
Investors are spooked, perhaps rightly so after seeing how Beijing has gone after many other sectors, from data collection to online insurance, vaping and alcohol, education and property. China’s biggest chip foundry Semiconductor Manufacturing International has fallen 10% this month while Shanghai-listed Will Semiconductor is down by a similar amount. Shares in chip developer and importer GigaDevice Semiconductor have tumbled 25%.
While some of the crackdowns China has instigated may be head-scratching, there is logic to this one. President Xi Jinping has made climate a national priority. A big part of that is continuing to foster the development of electric cars. Modern EVs, being more sophisticated than regular cars, need more chips and there can’t be more EVs if chips are being stockpiled for profit in warehouses. The State Administration for Market Regulation hasn’t named any names, not yet. Perhaps that will be its next move.
Before You Go
It’s the ultimate collector’s item for gearheads. A 1,824-horsepower Bugatti hypercar that boasts an eight-liter W16 engine, a seven-speed, dual-clutch automatic transmission, and can reach 62 mph in 2.17 seconds. First unveiled in October 2020 as an experimental concept, the French manufacturer is now making the Bolide a reality. Only 40 will be produced and each will cost a cool $4.7 million. But even then you’d be lucky to spot one. Deliveries won’t start until 2024 and the car won’t be legal to drive anywhere but on a race track.
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