The Asian Edition of Bloomberg News published at 8:00 GMT on October 19, 2022, an article “China’s Underground Market of Chips Draws Desperate Automakers”, an article about new energy vehicles, Huaqiangbei chip trade of “The No.1 Business Street of Electronic Products in China”, COVID-19, and other influences related. To be honest, this article by Bloomberg News is similar to other articles by Bloomberg published in the past featuring as always "fake, big, and empty” information heavily loaded with controversies. There are doubts, innuendos, and distortions about China's new energy automobile industry and Huaqiangbei Electronic Market. Song Shiqiang, a stall economist in Huaqiangbei, has carefully read this article 18 times. From the perspective of writing techniques, scenarios are vividly presented in the article. Additionally, some research has been done for it. Unfortunately, the level of cognition revealed in this article is still superficial as the underlying logic of the operation of related industries have not been detected. Consequently, the rules governing the operation of related industries have not been summarized.

With materials collected away from comprehensive and a biased analysis model, arrogance and prejudice in analysis naturally made the conclusion ridiculous for an expert like me. For example, Miss WANG, the boss mentioned in the article is a figure far from a typical representative. Additionally, there is little real knowledge and understanding revealed in the article over core issues as the business model of electronic business network in Huaqiangbei, the sales channel control of the original electronic components factory, the strict management on the supply chain for the discrete production model of the automobile factory, the quality control of electronic components, the authenticity detection of components, and other issues demanding professional expertise. In brief, the show-off in the article is adequately enough. It is equivalent to the show-off of skills of a women director in a village in my hometown, an urban and rural fringe of Xichong County, Sichuan Province. All her expertise exhibited is within playing tricks over small strives between the mother-in-law and the daughter-in-law.

A Screen-shot of Bloomberg News

My name is Song Shiqiang, General Manager of Shenzhen Kinghelm Electronics Co., Ltd. and Shenzhen Slkor Micro Semicon Co., Ltd. As a veteran driver with 18 years of driving experience from a small six-wheeled agricultural tractor, a stall economist who has been doing business from scratch to make a living in Huaqiangbei for 18 years, and an entrepreneur who has been committed in promoting the BDS/GPS antenna connector of Kinghelm brand and the 1200 V high voltage silicon carbide Field Effect Transistor (FET) of Slikor brand into the supply chain of the new energy vehicle industry, I have rich experience in solving difficult problems arising from my own entrepreneurship. I would like to share with you the theory revealed from my own entrepreneur experience over the following aspects to justify the name for China's new energy vehicle industry and boost the morale for Huaqiangbei, the "The No.1 Business Street of Electronic Products in China". I, Song Shiqiang, the General Manager of Kinghelm and Slkor, always talk nonsense with poker-faced seriousness in Huanqiangbei. In the same way, I am going to refute this Bloomberg nonsense with the same poker-faced seriousness!

I. Characteristics of the semiconductor industry:

A. The prospective layout of the wafer fab:

The most important feature of the semiconductor industry is the high investment, long cycle, and low return. This is especially true for the investment of the wafer fab. The wafer fab is also the throttle of the semiconductor industry chain and the bottleneck of the industry cycle. Since the investment is often of billions in scale, careful analysis for the layout of production lines for the wafer fab in advance is prerequisite for taking the lead in the competition.

Everyone knows about the investment opportunities arising out of new energy vehicles. The production capacity and market potential of automobiles in China are obvious to all. Wafer fabs and supporting passive component manufacturers have long term target for this layout. In Huaqiangbei Electronic Market, The No.1 Business Street of Electronic Products in China, MURATA and SAMSUNG had 0805 and 0603 capacitors with specification for vehicle use in the past few years. Their prices were lower than those of ordinary capacitors for civilian products. The reason for this lies in that the deployment of the production line was too early for new energy vehicles. In early 2000, The Trade Department of Kinghelm with business office in Huaqiangbei bought ceramic capacitors (including older types manufactured years ago) produced by MURATA for vehicle use with a value of several million yuan from outlets of chip supply chain in Tianhe, Guangzhou. It was not until the use of capacitors in infra-red forehead thermometers by our downstream customers to use up the backlog. 

B.Theplan and the activation:

Due to the large scale and expensive equipment of semiconductor factories, financial costs such as equipment depreciation should be carefully considered. Rising salaries of semiconductor practitioners would also push up the operating costs of production lines. The production scheduling of the production plan requires refined management. The most important thing is the operating rate of the equipment, also known as the utilization, which is the Break-Even Point of the semiconductor processing plant. It is also the button for self-regulation!

In general, the average utilization of the industry is about 70%. However, with stock shortage in the last two years, the number of fabs has increased by 115%, which releases much production capacity. TSMC, for example, worked overtime to produce mobile phone chips for HUAWEI in those years. Therefore, the stock shortage of semiconductors for car use is not as big as what is publicized outside. Because of the inherent complementary nature of electronic products, the structural shortage of one model of components would lead to a batch of components postponedin the shipping schedule. The information of shortage has been magnified infinitely in the internet era! 

The Gate of Kinghelm and Slkor in Traditional Chinese Style

C. Premium services for large enterprises:

It's all about business! There is no need to restate the value of big customers as automobile factories to original chip manufactures. At times when there is no urgent problems to be solved by chip manufacturers, it is a usual practice for sales representatives of chip manufacturers to meet contact persons of automobile factories, to say hello, to work on business review, and to work on new business exploration from automobile factories. In time of supply difficulties, chip manufactures as suppliers would spare no effort to solve SCM problems to show the value of chip manufacturers as partners. There are also golden opportunities for chip manufacturers to win more market share from automobile factories and defeat their competitors in business.

Automobiles are high-value products. Automakers are very strict in scheduling production. They have a series of considerations on the comprehensive strength of suppliers. Supply of many materials are secured by locking up production capacity well in advance. Car factories and semiconductor wafer fabs are leaders in the industrial chain. Meanwhile, they are also large tax payers and profit earners for the government. Even in Shanghai, where the epidemic was serious in the first half of this year, the government still provided white lists for TESLA, SMIC and other large enterprises to ensure their smooth production to the maximum extent. Besides, the profits of chips for cars are the most significant! 

D. The shortage of chip supply basically has little impact on major car makers.

The shortage of electronic components in the previous two years had an impact on lower end markets and consumer products. In contrast, there was little impact on high-end products such as automotive chips. Because of the high level requirements for automotive chips, large orders, high profits, and stable demand, the wafer fabs would make their best efforts to ensure that they can swap the capacity for low-end product lines whenever necessary. For example, the production lines for power devices such as MOS, IGBT and others are only merely enough to meet a balance between revenue and cost of the production line when the market is stable at ordinary times. For example, when the fingerprint chip under the screen suddenly rose up, the market demand for fingerprint chips under the screen for consumer products such as mobile phones grew rapidly and became a huge one, which had grabbed the production capacity of 8-inch wafer fabs previously manufacturing power devices. The decrease in the supply quantity of power devices brought about the price increase. At that time, the prices of Field Effect Tubes produced by Slkor, CEPOWER, and Silan rose sharply. Because we made preparations for "substitution of devices imported with devices home-made" of many models in advance, the high-voltage silicon carbide Field Effect Tubes and Hall components of Slkor brand entered the supply chain of many large customers!

II. Characteristics of the supply chain ofthe automobile industry:

According to my hands-on experience from Kinghelm and Slkor business with new energy vehicle companies for years and my knowledge in the automotive industry, the car assembly and production belongs to discrete manufacturing. It is characterized by that the product is composed of many parts and components. The processing and assembly of each part are independent from another. The production process for the entire product is therefore discrete. Finished parts are assembled through Component Assembly and General Assembly. Finally, these parts are transformed into finished products. Automobile assembly production belongs to the discrete manufacturing of the top level with extremely demanding requirements on the supply chain. This is also the relative advantage of automobile industry developed in recent years in our country. Every car factory is learning Lean Management from TOYOTA.

The most important part of Lean Management is the Supply Chain Management. A vehicle driven withinternal combustion engines has more than 20000 parts as fuel injection nozzles, spark plugs, camshafts, planetary gears, etc. First, these parts are assembled into assemblies with simple functions as carburettor assemblies, oil pump assemblies, distributor assemblies, etc. These assemblies are then assembled into systems, such as lubrication systems, braking systems, etc. The traditional internal combustion vehicle has about 9 systems. I came up with these knowledge when I studied JIEFANG CA10B 40 years ago and disassembled DONGFENG EQ140 30 years ago. My dream at that time was to drive a "BAIQUAN" agricultural vehicle, a model imitated GAZ to transport and sell sweet potatoes in the countryside. Unexpectedly, I can afford a "RED FLAG" CA7110B car now. In the past, cars were generally divided into two parts: the engine and the chassis. The revolution brought about by the new energy vehicle is that the engine was directly replaced by the battery and the motor.

With the development of IT and AI, new energy vehicles are equipped with more equipment as millimeter wave/laser radar, central control systems, auto driving systems, etc. With electronic components such as GPU, MCU, sensors, and other components are demanded in large quantities for these systems, the Supply Chain Management is more refined. As I planned to sell the BDS/GPS positioning and navigating antenna, the RF connector, the antenna connector and other products to customers specialized in new energy vehicles a few years ago, I carefully studied the characteristics of the new energy vehicle industry chain!

A.  Point to point closed-loop service:

The automobile factory is the top quality customer with the highest technical requirements for the original semiconductor factory. It is directly supplied by the original semiconductor factory or by the instructed agent. The qualification requirements for the agent are extremely strict. Similarly, the routine supervision is also very strict. Even if there are agents in the front grabbing for business opportunities, the original factory and the automobile factory maintain a very close relationship. Both parties attach great importance to the safe and stable cooperation of the supply chain. It is therefore highly unlikely prone to fraudulence.

B. The electronic component supplier certification

Automobiles are very special commodities. They are not only of high value, but also closely related to the safety of people's lives and property when they are in use. Therefore, there are unique 4S shop sales and maintenance modes, fault recall systems, and mandatory insurance systems during use. IATF16949 system is one of these systems to ensure the safety of automobile supply chain. Many secondary and tertiary suppliers of automobile factories must pass this certification before they can supply products to automobile factories. Another important point is that the ACE-Q100 system, formulated under the guidance of the Automotive Electronics Council (AEC), is a professional certification of electronic components for automobiles to ensure the unique quality of automobiles and the trust of brands. With very strict requirement, it covers a very comprehensive categories. Electronic and electrical products originally installed onto the vehicle in the automobile factory must pass the vehicle regulations.

C. Durability test: 

Another important test of automobiles is the durability test. It is required that the parts, samples and sample vehicles introduced as new products must be tested under the standard working conditions for 180 consecutive days. Most importantly, if the testing process is interrupted for some reason, it shall be restarted anew. Therefore, it is a very long and painful process for new products to enter the automobile supply chain as the durability test poses a big obstacle.

I can never tolerate myself writing an article as hastily as writers for Bloomberg. Allow me to share my own experience with you. A few years ago, Shenzhen Slkor Micro Semicon Co., Ltd. wanted to become a chip supplier of BYD for new energy vehicles. We sent the 1200 V silicon carbide Field Effect Transistor SL80N120A to the Sixth Business Unit of BYD in Kuichong, Longgang for the preliminary test. During the early stage of electrical performance test, members of the Research & Development team of Silicon Carbide from Slkor and I became frequent visitors to BYD. My used BMW tightly packed with expired MOUTAI liquor was photographed many times on the Tuyang Bridge because of my speeding over the speed limit of 80 km/h. The fine for over-speeding accumulated was enough to buy a toilet in my hometown, a 18th tier county.

If you have the opportunity to visit Mohe City in Heilongjiang Province in the northern part of China in winter, Sanya City in Hainan Province in the southern part of China in summer, and Lhasa City in Tibet Zang Autonomous Region on the highway with the highest altitude, then you may have the opportunity to know more about the vehicle testing. When you see a motorcade painted with various colors all over without manufacturer's logo making the series of cars strangers to anyone and drivers of the motorcade with sun-tanned hands with skin as rough as an old elm bark, it is the testing team from the automobile factory testing new cars. You do have the freedom to estimate the mileage for their test. This is the durability test of new models with complete vehicles by the automobile factory.

D. Incoming material inspection:

In view of the importance of key materials, the Supply Chain Management Department is very strict with the incoming material inspection process and quality standards, especially for core parts. Equipped with advanced testing instruments, testing equipment, and well-trained testing professionals, the IQC Department of the automobile company is quite authoritative and has very strict inspection indicators and requirements for all auto parts!

E. The Automobile Recall System and commercial compensation:

It is known to all that the automobile industry has a unique after-sales quality assurance and maintenance system called the "Recall System". If a certain type of vehicle is recalled in batches, the automobile factory would then lose a lot. In all automobile companies around the world, there is no company that has been free from bankruptcy or restructuring all along. This is just a very restricted view of the fierce competition. It is also a reflection of the importance of quality control and management in automobile production!

Commercial compensation will be paid after the arising of the quality problem. It is particularly important in terms and conditions of the supply chain agreement of automobile manufacturers. An occurrence of commercial compensation may lead to bankruptcy of the automobile manufacturer. I have a real story to share with you. A few years ago, a giant player in the new energy automobile industry from overseas claimed 500 million dollars from the customer of my friend because of a quality problem arising out of a MOS manufactured by TOSHIBA. He was so scared that half of his hair turned white overnight. He made an early morning call to me at 3:00 a.m. for help. In turn, this call rewarded me a sleepless night. At last, it was me, Song Shiqiang from Kinghelm who helped him to settle the dispute. Later, he gave me two bottles of aged MOUTAI liquor to express his gratitude. In 30 years, I will be able to tell this story in fuller detail for bragging!