China carmakers careen towards chip's siren call

By Katrina Hamlin

HONG KONG, Sept 16 (Reuters Breakingviews) - 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 NVDA.O or Qualcomm QCOM.O, which offer off-the-shelf components, or license existing designs from Arm ARM.O. Among smartphone makers, only a few - led by giants Apple AAPL.O, Huawei and Samsung Electronics 005930.KS - 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 9866.HK debuted models this year featuring self-developed smart-driving AI chips. Rival Xpeng 9868.HK also unveiled its own advanced driver-assistance system processor for its cars last year, while Li Auto 2015.HK and BYD 002594.SZ 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 9660.HK.

That bodes ill for smaller brands like Nio. The group is on track to sell around 350,000 cars this year, per Visible Alpha, at an operating loss of nearly $2 billion. It isn't expected to make more than 1 million vehicles annually this decade. Meanwhile its annual R&D expenses have quintupled to $1.8 billion since 2020 and accounted for a fifth of its top line in 2024. Last week, the company announced it would sell shares to raise $1 billion for smart car technology, among other items.

That is hardly enough. Handset-to-car maker Xiaomi 1810.HK said it will invest at least 50 billion yuan ($7 billion) over the next decade to develop its own chips. For China's auto brands and their investors, it will be a long time, if ever, before they see any returns.

Follow Katrina Hamlin on Bluesky and LinkedIn.

CONTEXT NEWS

Horizon Robotics' revenue grew 68% year-on-year to 1.6 billion yuan in the first six months of 2025, according to interim results published on August 27. Its adjusted net loss grew 66% to 1.3 billion yuan.

Black Sesame International's 2533.HK revenue grew 40% to 253 million yuan over the same period, while its adjusted net loss expanded 9% to 549 million yuan, per filings on August 29.

Bigger carmakers stand more of a chance of reducing costs per chip