Increased trade tensions between the United States and China have thrown into relief the main vulnerability in China’s auto industry—its reliance on US-made semiconductor chips. Even as Beijing has been striving to accelerate domestic chip manufacturing, Chinese automakers remain dependent on foreign technology, especially for critical parts such as microcontroller units (MCUs) and analog chips essential for sophisticated vehicle systems.
To relieve industry pressure, China recently granted an exemption of tariffs for eight types of U.S.-produced auto chips, even though they had increased import tariffs to 125% before. The action is a testament to the need to obtain these crucial components as soon as possible, as they are still irreplaceable in the near term for most manufacturers.
Despite heavy investment by China in its semiconductor industry, local manufacturers still provide only around 15% of the chips that are being used in the nation’s auto sector. That is less than the state’s goal of 25% and reflects the difficulty of lessening dependence on overseas technology.
Automotive chips are very sophisticated to produce and entail stringent testing requirements. Such challenges have been a stumbling block for domestic firms to fend off established worldwide players, who provide sophisticated and tried-and-tested chip solutions. Thus, U.S. and European firms continue to control the world supply chain of automotive semiconductors.
In the face of these difficulties, China is rushing to establish a more indigenous chip industry. Still, becoming technologically competitive enough to entirely substitute foreign suppliers is a long-term objective. Meanwhile, China’s automobile makers need to balance delicately between having access to global chip supplies and developing their own capacities.
