(Bloomberg):While advanced semiconductor companies in the United States and its allies are pulling away from China, the market for less advanced semiconductors is becoming increasingly reliant on China.

The importance of China to major makers of automotive chips was underscored in their latest quarterly earnings as electric vehicles, which drive demand, have been slow to take up in the West, leading to a buildup of inventories and making it difficult for them to make sales.

NXP Semiconductors CEO Kurt Sievers said electric vehicle sales in China have “grown phenomenally” this year, in contrast to weaker manufacturing markets in the U.S. and Europe. Infineon Technologies AG CEO Jochen Hanebeck said China’s resilience has helped the company’s bottom line, even as a broader recovery in the electric vehicle slump remains unclear. Texas Instruments Inc. (TI) saw its China business grow by up to 20% in all five of its product markets.

For these semiconductor makers, deepening ties with China could be a double-edged sword as geopolitical tensions spread to the auto sector. The European Union and the United States have imposed tariffs on Chinese electric vehicle imports, and on Tuesday, Beijing filed a complaint with the World Trade Organization, alleging that EU anti-subsidy tariffs violate trade rules. The United States and Europe are also keeping a wary eye on older generation semiconductors, also known as legacy chips.

Tensions between the U.S. and China over technology have so far centered on U.S. restrictions on Chinese access to advanced semiconductors and the equipment that makes them. China has responded by striving to become self-sufficient in semiconductor technology, particularly in automotive chips, which don’t rely on cutting-edge manufacturing processes and are largely unaffected by U.S. export restrictions. This gives China the freedom to encourage domestic manufacturers to develop chips that could eventually displace foreign manufacturers.

“Just as the EU’s strong auto industry has supported leading automotive chip makers such as Infineon, NXP and STMicroelectronics, China’s world-leading EV industry is encouraging domestic manufacturers to develop such semiconductors,” John Li and Jan-Peter Kleinhans of the German Council on Foreign Relations wrote in the report. Such moves could boost the competitiveness of Chinese automakers and “deal a strong blow to European companies and their economies.”

Right now, Chinese auto-chip makers can meet only about 10 percent of domestic demand, Li and Kleinhans said. That’s a boon for Infineon, NXP and STMicroelectronics, which all get about a third of their sales from China. Japan’s Renesas Electronics relies on China for about 25 percent of its sales, while Texas Instruments International AG relies on China for 20 percent.

The Chinese government has told Chinese electric vehicle makers such as BYD and NIO to source more semiconductors domestically, and most of the new chip-making capacity being built in China is for the automotive industry. The European Commission is concerned that chipmakers could lose significant market share in China as a result, Bloomberg News reported in June.

Quarterly earnings reports don’t typically include a regional breakdown, but investor presentations give some insight into how important the Chinese market is to European chipmakers. Renesas shares fell the most in about 15 years on the Tokyo market on July 25, after the company reported a weaker-than-expected operating profit.

TI CEO Habib Iran is not taking a passive stance on China, saying on July 24 that “we can compete and we can win business,” but acknowledged that competition is getting tougher.

“The notion that the Chinese are only trying to do the easy part of the semiconductor market is wrong,” Ilan said. “They are a very ambitious and well-educated competitor.”

Original title: World’s Top Auto Chipmakers Deepen Their Embrace of China (1) (excerpt)

–Interview cooperation:Debby Wu,Ian King,Craig Trudell.

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