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Shenzhen – In a two-bedroom apartment on the outskirts of China’s tech hub, Shenzhen, Wang wakes up with a barrage of messages. 1 read: “SPC5744PFK1AMLQ9, 300 PC, 21+. Needed?”

Within minutes, the 32-year-old was in her living room at her computer. The code referred to a chip manufactured by NXP Semiconductors and used in automotive microcontroller units. The sender of the message was trying to find her 300 takers manufactured by 2021 that she owned.

Neither Wang nor his six-member team are authorized chip dealers. Freelance brokers like her used to be the mainstays of China’s semiconductor market, but when chip shortages began around the world in late 2020, disrupting the supply of everything from smartphones to cars, they began to thrive. became more and more important. Now they form a large gray her market. An opaque forum populated by hundreds of middlemen, full of second-hand and obsolete chips, the cost of getting just one is as high as 500 times his original price.

The situation is most acute in automotive chips, as the industry is being revolutionized so that cars are becoming like computers on wheels. The United States’ recent export restrictions on chip technology will only exacerbate the shortage and encourage underground activity, said the head of China’s major automobile association.

Opportunists around the world are using chip shortages to drive up the price companies pay for critical circuit components. But a lack of regulation and surging demand — China is the largest global market for cars and is suffering from a new wave of electric vehicles (EVs) — means that under-the-table deals are more widespread here. It means that

Bloomberg News has summarized how complex networks work in numerous interviews with more than a dozen people involved in this world. Many brokers say substandard chips have permeated the supply chain too much, jeopardizing vehicle quality and, worse, safety. For example, if a rogue chip fails in his ABS braking module in a vehicle, the consequences could be life threatening.

German auto parts supplier Robert Bosch has been approached by a Chinese automaker to use chips it sources on the gray market to process auto parts, according to people familiar with the matter. Received multiple requests. Bosch ultimately declined his request, believing the chip could jeopardize the integrity of its components. One automaker said prices skyrocketed during the Covid-19 outbreak after Bosch’s Malaysian supplier had to stop producing chips used in Bosch’s ESP (Electronic Stability Program) products. We commissioned Bosch to work with our gray market semiconductors. ESP works in conjunction with the car’s anti-lock braking system to detect skidding motion and counteract it. Bosch refused, one of the people said.

Businesses like Wang are legal in that they are registered businesses and pay taxes, but assessing the origin of chips sold on the gray market can be difficult. Chips can come from questionable channels. That is, back door sales from authorized distributors who may have over-ordered the manufacturer, whether intentionally or not, or in violation of their contract with the original chip manufacturer to sell extra chips for profit. We are a legitimate company. Some brokers have also violated Chinese regulations and sought to profit from hoarding and price spikes that local authorities have called for a crackdown.

A Bloomberg report found that the semiconductors required for microcontroller units are the most difficult to source and command the most eye-catching prices. This is because it is used in so many parts of the car, from electronic braking systems to air conditioning to window control units. In a world where chips are smarter and smaller, the margins are tighter as they require far less advanced technology to manufacture. A surge in demand during the pandemic has led to a significant drop in the supply of microcontroller unit chips as chip makers switched production to more profitable semiconductors for use in consumer electronics and medical devices.

Automakers responded in different ways. While Toyota and Volkswagen have slashed production and deliveries, Tesla has found a workaround and developed new software that allows the pioneering electric car maker to use alternative semiconductors. In China, where there were about 200 registered EV makers last year alone, the fierce nature of the domestic market has made domestic players especially receptive to chip gray his market.

All three of China’s major US-listed EV startups (Nio, Xpeng and Li Auto) have attempted to purchase chips through these unauthorized distributors. In fact, almost all Chinese automakers except BYD, China’s largest EV maker, which makes its own chips, are trying to source chips this way, the people said.

Beijing-based Li Auto, known for its flagship sports-utility vehicle Li One, paid one broker about $1 in brake chips before the pandemic.

Nearly every car company has chosen to compromise by accepting chips that are at least outdated. Pre-Covid, automakers typically only used chips made in the last 12 months. Today, many are using semiconductors manufactured four or five years before him, if they are of the right type.

Cui Dongshu, general secretary of the China Passenger Vehicle Association, said it was impossible to detect that used or refurbished chips might be circulating in a vehicle, so regulators are restricting gray market trading. He said he struggled to direct. He doesn’t know if that will lead to safety issues, but “at least it’s not fair because consumers aren’t informed about it,” he said.

While global automakers such as Toyota and General Motors have said chip shortages are showing signs of easing, Fitch Ratings has warned that semiconductor shortages, especially in China, shipment delays and the coronavirus pandemic A combination of lockdowns by the government will not see a full recovery until 2023. bloomberg China’s Black Chip Market Attracts Desperate Automakers

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