A Ban Too Far? Proposed U.S. Prohibitions on Chinese Auto Hardware Face Challenges

The U.S. Department of Commerce’s proposed ban on Chinese hardware in automobiles is likely to face daunting implementation obstacles due to the complexity and interconnectedness of the global motor vehicle supply chain.

The ban calls for prohibiting Chinese-made hardware and software in motor vehicles with built-in communications, including those with internet, Bluetooth, navigation, autonomous driving, or similar connectivity beyond the car itself.

The policy was spurred by concerns within the Biden administration that Chinese companies could collect data on Americans and even manipulate connected cars. With details scarce, the ban raises several uncertainties.

The sweeping nature of the policy could result in the complete stoppage of sales of any Chinese-made automobile in the U.S., including both internal combustion engine (ICE) cars and electric vehicles (EVs). It is unknown if brands like Volvo and its sister EV maker Polestar, majority-owned by China-based Geely Auto (Zhejiang Geely Holding Group), will be impacted.

Similarly, it is uncertain whether a vehicle ban would impact vehicles that are not Chinese brands but assembled in China; GM and Ford assemble autos in China.

Finally, the definition of “hardware” will be vital as it relates to the ban – for example, does the term encompass upstream raw materials and manufacturing?

Reportedly, the ban on Chinese software would take effect with 2027 model-year vehicles, and hardware prohibitions would be effective with 2029 and 2030 model-year vehicles. As a result, even employing a single electronic component (e.g., a microcontroller or analog converter) will require detailed qualification by an automaker, which often takes two or more years to complete.

Automotive systems and electronic components do not typically have ‘drop-in’ replacements, meaning they are not interchangeable or easily replaceable.

It should be noted that in the U.S. and Canada, an automotive model year is not the year of production (e.g., 2025 models have been offered for sale since June from some automakers). As a result, if the reported model-year timeframes become effective, automotive OEMs and suppliers will likely be unable to meet at least some of the measure’s hardware restrictions.

Electronics Supply Chain Realities Raise Obstacles

From an electronic component and immediately adjacent commodity perspective, several factors may make the hardware ban difficult to implement, including:

• The supply chain and manufacturing of electronic components, systems, and EV batteries are astoundingly complex. 
• Decoupling from China in semiconductor production is difficult today. Given the impact of various semiconductor manufacturing equipment exports into China, it may further challenge it, which led to its investment in expanding more mature (greater than 28-nanometer process nodes) semiconductor production. Moreover, it can be very challenging to determine precisely where a chip is initially produced, yet country-of-origin data and analytics are improving. 
• China has doubled down on more mature semiconductor manufacturing because of export controls and the steady, long-term demand from various end markets, including the automotive sector.
• Process nodes of 40 nanometers and larger are utilized to manufacture some of the most common components widely used in auto applications, including microcontrollers (up to 100 per vehicle), sensors (up to 120 per vehicle), and analog ICs.
• According to Supplyframe Commodity IQ analysis, analog ICs (produced on more mature semiconductor process nodes and numbering about 100 per vehicle) are poised to become again supply-constrained for autos due to limited production capacity on mature nodes as soon as 2025, and the expected 20% or more increase in the number of these ICs in automobiles in just a few years. 
• Some 90% of automotive-grade semiconductors (e.g., that can withstand high temperatures and have higher reliability standards) are manufactured with 40-nanometer and larger process nodes. 
• According to SEMI (a non-profit association), capital expenditures for global IC production at 40 nanometers and above are less than a quarter of the total.
• The average modern automobile includes about 1,400 ICs, and many are employed for sophisticated applications, such as advanced driver assistance systems and autonomous driving.

Implications for Component Buyers

In light of these challenges, it is likely that the hardware ban will be ineffective based on the current timeline and will likely have to be delayed to ensure compliance.

U.S. buyers are striving to reduce their dependence on Chinese-made semiconductors, given the Biden administration’s plan to hike the tariff rate on imported semiconductors to 50% in 2025, up from 25%. However, the proposed ban would add new urgency to the process of supply-chain decoupling.

Under these circumstances, buyers are advised to redouble their efforts to diversify their supply base and seek alternative sources, such as domestic U.S. suppliers. The Biden administration is working to increase U.S. production of mature-node chips suitable for automotive applications, announcing a $1.6 billion effort to fund production. However, these plans will take years to come to fruition.

As a result, automotive buyers should keep an eye on the timeline for the ban’s implementation and watch for potential changes. In the meantime, buyers should expect rising challenges in sourcing mature-node chips for automotive applications during the coming years.