China carmakers careen towards chip's siren call

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By Katrina Hamlin China's carmakers are racing to develop smart-driving semiconductors in-house. It's a perilous journey, but even the slim prospect of immense rewards can be too alluring to ignore.Only a handful of companies worldwide have successfully designed their own chips. The technological complexities - processors today have billions of transistors - plus the astronomical costs mean most businesses will just buy from specialists like Nvidia NASDAQ:NVDA or Qualcomm NASDAQ:QCOM, which offer off-the-shelf components, or license existing designs from Arm NASDAQ:ARM. Among smartphone makers, only a few - led by giants Apple NASDAQ:AAPL, Huawei and Samsung Electronics KRX:005930 - have succeeded after years of heavy investments. Partly thanks to its vertical integration, the company run by Tim Cook boasts a 40% gross margin for its iPhone, according to Visible Alpha. It is a formidable feat that $16 billion Nio NYSE:NIO debuted models this year featuring self-developed smart-driving AI chips. Rival Xpeng HKEX:9868 also unveiled its own advanced driver-assistance system processor for its cars last year, while Li Auto HKEX:2015 and BYD SZSE:002594 have similar ambitions.The rationale to do so is compelling. Developing chips alongside software such as Nio's homegrown SkyOs makes it easier to design and continuously upgrade a coherent, efficient system that fully utilises the hardware's computing power, especially for uncertain technology that's still evolving quickly. And in-house operations can bolster fragile supply chains: the disruptions to them sparked by COVID-19 meant that even in 2022 Chinese manufacturers were facing waits of as long as a year for semiconductors. Today, Washington's export controls and sanctions also pose a risk to Chinese firms.But the financial case is harder to justify, because outsourcing is simply cheaper and more efficient. Developing a chip can take five years or more, per consultancy AlixPartners. And it will require hiring thousands of engineers. BYD's intelligent driving team, for instance, has swelled to over 4,000 people covering both software and hardware. Analysts at Bernstein estimate that only auto manufacturers with annual production exceeding 1.5 million vehicles stand any chance of being able to make in-house chips more cost-effective than buying from Nvidia or Beijing-based Horizon Robotics HKEX:9660. That bode...

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