Amid the crisis, electric car makers have emerged mostly unscathed, largely because of their smaller production volumes and reliance on higher-end chips like AI processors, used for complex data processing tasks, that can cost US$100 apiece. Traditional car makers consume high volumes of microcontrollers for engine control, currently in short supply despite their US$1 price tags.

Artificial intelligence (AI) chips “are much more expensive and important for smart EV makers,” said Wang Junkang, a design engineer with Li Auto, one of China’s three New York-listed NEV start-ups. “The leading smart NEV start-ups are not competing against ICEs to secure supply of the AI chips.”

Producers of ICEs are pinning the blame on a 2020 miscalculation over the pace of recovery in demand for big-ticket items such as automobiles during the Covid-19 pandemic, which drove foundries to shift to making higher-value chips for game consoles and gadgets, said ST Microelectronics’ engineer Qiao Mu.

“Carmakers and consumer electronics companies slashed orders [for chips] as they expected their products to tank during the Covid-19 pandemic,” Qiao said in Shanghai. “An unexpected surge in demand for automotive chips exacerbated the shortage.”

The global automotive industry bought US$43 billion worth of chips in 2019, about 10 per cent of the worldwide supply, according to a Bain & Co. analysis. Taiwan Semiconductor Manufacturing Corporation (TSMC), the world’s largest foundry, is the biggest supplier of microcontrollers used in automobiles, with supplies to the sector making up 3 per cent of its quarterly sales.

About 25 per cent of this market for automotive chips is in China, with more vehicles – both powered by petrol engines and electric batteries – on its roads than any other country, which also serves as the “world’s factory” where electronic components and vehicle modules from entertainment systems to steering are assembled.

China’s 2018 automotive chip market was valued at 61 billion yuan (US$9.5 billion), mostly comprising imports, according to data provided by independent automotive analyst David Zhang.

The market could more than double in 2022 due to the increasing application of intelligent features in new vehicle models such as self-parking, satellite navigation, voice command and Internet of Things (IoT) technology, he said.

“A shortage of chips will not be just a short-term pain for the global automotive industry,” Zhang said in Shanghai. “It will take at least two years before global carmakers and semiconductor manufacturers can work out a solution.”

Many of today’s automobiles, particularly the NEV vehicles, use chipsets with AI processors that support safe and accurate intelligent driving technology including cruise control, level 4 autonomous driving, and self parking. Each AI chipset could cost 100 times more than the controllers used to regulate the engines on petrol-guzzlers.

Automotive chip production first took a hit in the first half of 2020 when lockdowns being enforced in various countries closed factories. As China’s economy emerged from lockdown during the second half, and factories got back on line, semiconductor foundries failed to keep up.

For now, carmakers are scraping the bottom of their inventory to keep production going.

“This could have a significant knock-on effect on jobs and the economy given the importance of auto manufacturing,” Ford said on February 4.

“We are working closely with suppliers to address potential production constraints tied to the global semiconductor shortage and working to prioritise key vehicle lines for production, making the most of our semiconductor allocation,” the carmaker said.

Still, any production disruption would be painful, particularly when China’s automotive industry is struggling to turn the corner on a two-year sales slump, where many assemblies are operating with idle capacity.

China’s car sales increased during the six months ended in December, as customers returned to showrooms amid a tentative recovery in consumer sentiment in the first major economy to emerge from the coronavirus lockdown.

Sales of passenger vehicles – cars, sports-utility vehicles (SUVs) and minivans, excluding commercial trucks and buses – rose 8 per cent to 11.75 million units between July and December, beating early forecasts for a sharp drop.

Annual sales fell for the third year in 2020, contracting by 6.8 per cent to 19.6 million units, according to data by the China Passenger Car Association (CPCA). The full-year sales volume beat the 27 per cent decline predicted in April by McKinsey.

The worldwide chips shortage could cut China’s first-quarter output by an estimated 250,000 vehicles, with the joint venture assemblies of Volkswagen, General Motors and Honda Motor being particularly vulnerable, said IHS Market. That would be about 4 per cent of China’s production volume for the first three months.

The shortage could delay the automotive sector’s recovery from the pandemic-related drop in demand. It would result in lost production of 1 million units across the globe in the first quarter of 2021, the rating agency added, citing data by Wards Intelligence and LMC Automotive.

IHS Markit said supply lines were already stretched by significant demand for chips from the consumer electronics sector, 5G phones and infrastructure to vehicle builders.

“There are no easy fixes to the capacity constraint owing to the long and complex manufacturing process of semiconductors, which make new capacity building a capital-intensive and time-consuming affair,” IHS Markit said. “The crisis has highlighted that the traditional short-term sourcing cycle that automotive companies have pursued may not bode well with production and scale cycles that the consumer electronics sector commands to semiconductor manufacturers.”

“The trend of making cars smarter has been there for a while, but the automotive and semiconductor industries need time and money to digest the demand,” said Peter Chen, an engineer with car component company ZF TRW. “Shortage of chips will more or less affect the recovery pace of the Chinese car market.”

Electric car makers, including Tesla and New York-listed NIO, Xpeng and Li Auto, have all reported a bumper month in January, as a slew of government incentives and new models stoked demand.

NIO’s January deliveries jumped 352 per cent from last year to 7,225 vehicles, while Xpeng’s sales soared 470 per cent to 6,015 units and Li Auto increased its distribution by 356 per cent to 5,379 cars over the same period.

“Fortunately, we are not affected by the problem,” said Brian Gu, vice-president of Xpeng. “XPeng focuses on producing premium smart electric vehicles with high-end chips that are not mass-produced. Our production volume for this year and the next remains relatively manageable, compared to some larger OEMs (original equipment manufacturers) that would require far more chipsets.”

Xpeng designs its own AI chips with Nvidia, made by the Santa Clara, California-based company on a production line separate from the assembly for game consoles and electronics.

NIO and Li Auto are also upbeat about their production and sales outlook, saying that the global chip shortage has had no negative impact on their operations.

High-end artificial intelligence (AI) chipsets such as Nvidia’s Xavier, used by EV makers such as Xpeng’s P7 saloon cars, do not use capacity for mass-produced chips, demand from the start-ups can be met with ease, analysts said.

Stronger demand for smarter vehicles in the world’s largest car market in 2021 would exacerbate chip shortage where drivers are looking to new models that feature more sophisticated in-car entertainment and driving safety systems.

All eyes will be on how large the volume of deliveries will turn out to be, while supply of chipsets does not appear to be a concern, said Wang Bin, a Credit Suisse analyst.

“New-energy vehicle penetration rate in China increased amid the Covid-19 outbreak and that was a positive sign,” he said. “Conventional carmakers are playing a catch-up game as they try to churn out more high-end cars to woo customers.”