China vs. USA – Tit for Tat pt. III.

Tit for tat battle spreads to automotive.

• A switch by Chinese OEMs to Chinese semiconductor suppliers in the Chinese automotive industry is unlikely to have much impact beyond media headlines but represents a great opportunity for MediaTek to pick up business for its new automotive products.
• The Chinese state is asking EV makers to source semiconductors for their vehicles from Chinese suppliers wherever they can in yet another sign of the slow and painful decoupling of the US and Chinese economies as a result of the ongoing ideological struggle.
• A target has been set to procure 25% of all automotive semiconductors from Chinese companies by 2025 and given that the Ministry of Industry and Information Technology is unhappy with progress, there is still a lot of work to do.
• There is some low-hanging fruit here for China as in the domains of Body, Safety, Comfort and so on, one does not need particularly advanced semiconductors to run these domains.
• Consequently, even with the heavy restrictions that have been placed on Chinese semiconductor companies, they should be able to produce chips for these segments.
• However, there are two problems:
  • First, Reliability and redundancy: Vehicle electronics have to be more robust and reliable than most consumer electronics which adds a degree of complexity when it comes to designing semiconductors to go into vehicles.
  • For example, when the brake pedal is pressed, the brakes have to engage and so vehicles have extra circuitry and safeguards to ensure that these sorts of functions never fail.
  • RFM research has concluded that the Chinese semiconductor industry is at a fairly early stage when it comes to designing and manufacturing silicon chips for vehicles.
  • Hence, I suspect that it will be some time before the industry comes up the learning curve which is probably the main reason why the 2025 target will be missed.
  • Second, Growth in processing: in automotive is not in areas that the Chinese semiconductor companies have strong offerings.
  • RFM research has concluded that the two domains where the vast majority of growth in automotive semiconductors will be Advanced Driver Assistance Systems (ADAS) and Digital Cockpit.
  • This is because ADAS is where all of the automated driving functions are being implemented and Digital Cockpit is where digital experiences and services are being created.
  • ADAS is currently dominated by Mobileye and Nvidia while Qualcomm has been winning a lot of business in the digital cockpit and also to some degree in ADAS.
  • Qualcomm’s automotive processors share a lot of commonality with its smartphone processors which are made on advanced processing nodes which will make it very hard for Chinese semiconductor companies as they can’t procure the equipment they need to make them.
• Hence, in the short to medium term, I don’t think that the Chinese car makers will be able to procure nearly as much silicon from Chinese companies as the Chinese state would like.
• I suspect that the fact that the request has been worded with “wherever possible” is a tacit admission that this is more complicated than one would assume at first glance.
• This also represents an opportunity for MediaTek to win business as it has recently launched an automotive offering and has partnered with Nvidia for ADAS.
• Here, Nvidia provides GPU cores for MediaTek to include in its chips so that it can address both of these domains with a single chip family.
• This is precisely the direction that Qualcomm has taken with Snapdragon Digital Cockpit, Ride and Flex (which can support both).
• MediaTek is a Taiwanese company and Taiwan falls into that geopolitical grey area where it is both Chinese and not Chinese depending on who you ask.
• Hence, I suspect that MediaTek will have an easier time selling in China as opposed to its US-based competitors.
• The net result is that the suppliers most at risk are the likes of Infineon, Texas Instruments, NXP and so on and will see immediate erosion.
• For the likes of Nvidia and Qualcomm, it will take a lot longer for China to be able to compete and so I do not see an immediate impact on their short to medium-term outlook.
• I own Qualcomm and remain happy to hang onto it as there could be significant upside from the company taking share from Intel and AMD in the laptop market with its new processors.