Chip delays slow down deliveries in China, automakers face another supply challenge.

Author | Zhou Zhiyu

"The production capacity was all ready, but we didn't expect to run into trouble with the materials."

On September 8, a source from Huajing confirmed to Wall Street News that chip supply has affected vehicle delivery, and the delivery cycle will be extended. "We are currently adjusting the plan with Huawei."

The Huajing S, launched four months ago, is currently in the delivery ramp-up phase. Wall Street Insights has learned that Huajing S deliveries are currently affected by a temporary shortage of the automotive infotainment chip needed for the HarmonyOS cockpit.

Prior to Huajing, Buick and XPeng had also disclosed the impact of chip supply on production and delivery arrangements. While the affected components and models differ, the cost pressure from rising memory chip prices has already entered the operating accounts of many automakers.

A supply chain insider told Wall Street News that the pressure had been building for a while, but it had recently become unbearable.

Over the past few months, the automotive supply chain has been stockpiling inventory and securing production volumes, with some companies extending their procurement plans to next-generation models. Existing inventory helped automakers mitigate some of the price increases. However, as more expensive chips enter production, the procurement costs automakers are paying to maintain output are also rising.

More challenging changes are occurring within the vehicles themselves. The cockpit, driver assistance systems, and electrification systems are increasing semiconductor spending per vehicle, and memory procurement is increasingly impacting overall vehicle costs. Buying more memory is actually driving up prices. The familiar notion that "costs will come down once production volume increases" is encountering new obstacles.

Chip supply delays have slowed deliveries of some new cars and begun to alter automakers' growth calculations: lowering prices to boost sales requires incurring higher procurement costs first. How much of the money saved from in-house R&D and technology integration can be used for upgrading components and lowering prices has become a major challenge for the automotive industry in this round of price increases.

Pressure is transmitted to the delivery end

The delivery ramp-up of Huajing S slowed significantly in August.

This car was launched in May, with 3,603 units delivered that month. Deliveries increased to 5,689 units in June and 7,203 units in July. In August, deliveries reached 7,306 units, an increase of only 103 units from the previous month. Huajing acknowledged that its anticipation and contingency plans regarding the overall chip supply challenges in the industry were insufficient, resulting in longer waiting times for some users.

Currently, Huajing has launched a special supply guarantee effort, stating that it will communicate with core partners to expand chip supply channels and accelerate the implementation of diversified supply solutions. For customers who have placed orders but have not yet taken delivery, Huajing stated that dedicated consultants will continue to follow up and update production schedules and order progress through the official app.

Other brands have issued similar warnings before. On July 1st, Buick warned that a shortage of chip supply might cause delays in the delivery of some E7 vehicles, and offered a 30-day delivery guarantee to customers who placed orders that month: if the delay was due to brand issues, a compensation of 100 yuan per day would be provided starting from the 31st day. On August 7th, Jiang Wen, head of R&D for XPeng Motors' MONA series, revealed that fluctuations in the supply of high-end process chips had impacted the August production of MONA L03, but the problems had been gradually overcome, and the factory was switching to double-shift production.

Supply fluctuations have affected multiple automakers, with the impact on deliveries concentrated on specific models and stages. Jiang Wen, in introducing the production schedule, also mentioned that the MONA L03 targets both domestic and international markets, offering both pure electric and range-extended versions with hundreds of configuration combinations. Even for the same model's ramp-up phases, the necessary components for each of these versions must be arranged separately.

Wall Street Insights also learned from some Buick dealerships that when deliveries were previously delayed, standard configurations could be delivered normally if the dealerships still had inventory. During the factory's adjustment of supply arrangements, some deliveries were maintained for vehicles already in stock.

The problem of rising storage prices has been mitigated by inventory levels in the past.

On September 3, NIO founder, chairman and CEO William Li told Wall Street News that Q1 was a little better because there was still some inventory from last year, but Q2 basically had none.

In the second quarter, NIO's cost per vehicle increased by approximately 14,000 yuan compared to the end of last year, involving memory, batteries, and other raw materials. According to Li Bin, this totaled approximately 1.5 billion yuan more in one quarter. The price buffer provided by old inventory gradually disappeared as materials were updated.

Earlier, BYD announced that starting in May, it had increased the price of the "God's Eye B Laser-Assisted Driving Edition" option on some models from 9,900 yuan to 12,000 yuan, explicitly mentioning the rising cost of storage hardware. From price increases for optional features to delivery delays, the pressure on chip supply is being conveyed to consumers in different ways.

The problem of diseconomies of scale

An executive from a new energy vehicle company told Wall Street Insights that with rising chip prices, semiconductors in some vehicle models have surpassed batteries to become the most expensive component type in the car.

Electric drive systems, cockpits, and driver assistance systems have already added another significant portion of semiconductor spending beyond batteries. PwC's "Global Semiconductor Outlook 2026" points out that the move towards higher levels of autonomous driving will simultaneously increase the number of chips and the average price per chip; the centralization of electronic and electrical architecture will further drive demand for high-performance processors, AI accelerators, and high-speed storage.

According to Li Bin's estimate, the cost per NIO vehicle will increase by 16,000 to 17,000 yuan in the second half of 2026 compared to the end of last year. Among them, memory will account for an average of about 10,000 yuan, and the battery will account for about 3,000 to 4,000 yuan.

This expenditure is impacting the economies of scale that automakers are familiar with. In the past, the familiar approach for automakers was to invest in R&D and other routine expenses, and as the scale increased, the expenses would be diluted accordingly, allowing automakers to obtain profit margins from economies of scale.

However, different pricing patterns have emerged in storage procurement. The aforementioned executive from a new energy vehicle company stated that currently, ordering less memory offers a discount; ordering more, however, drives up the price. This has led to a situation of "diseconomies of scale" currently facing automakers.

Under these procurement conditions, the two accounts resulting from increased sales volume began to diverge. Investments in factory buildings, equipment, and molds could be spread across more vehicles, but memory needed to be purchased with each vehicle. Lowering prices to secure orders reduced revenue per vehicle and increased the demand for materials purchased at the new quoted prices. Therefore, the cost of the price reductions, which was initially expected to be offset by increased sales volume, became even more difficult to recoup.

When explaining the trade-off between volume and price, Li Bin said that the actual fixed costs that can be amortized are not as many as imagined. When NIO conducts internal calculations, it prioritizes total gross profit and operating profit: small price reductions are unlikely to bring about a significant increase in sales volume, while large price reductions are not supported by the cost structure.

The company's gross profit margin for vehicles in the second quarter was 18.5%. According to Li Bin, the sales contribution of high-margin models, as well as the cross-platform, cross-model, and cross-brand reuse of underlying technologies, helped NIO absorb the rise in raw material costs. The gains from these operational improvements were partially offset by additional procurement expenditures.

Li Bin said that NIO has also withdrawn the 10,000 yuan purchase tax guarantee previously offered for some models. He also considers the narrowing of discounts as a price adjustment: "In fact, it's a price increase."

The cost of ensuring supply

In response to supply pressures, Wall Street Insights learned from supply chain sources that automakers and suppliers are trying to increase inventory to ensure future supply.

This already requires more funding. Desay SV's semi-annual report shows that the book value of the company's various raw materials increased from 1.71 billion yuan at the beginning of the year to 3.96 billion yuan at the end of June; during the same period, net cash flow from operating activities decreased by 35.10% year-on-year, which the company mainly attributed to increased expenditures on raw material inventory. Suppliers initially bore the procurement costs by preparing materials in advance for downstream automakers.

Procurement contracts provide another layer of protection. An executive from a leading domestic automaker stated that automakers include breach of contract clauses in the agreement on purchase quantities and prices to prevent suppliers from raising prices arbitrarily. These existing procurement arrangements delay the transmission of market price increases to automakers' costs.

When allocating production capacity, storage manufacturers also compare the returns of different products. TrendForce points out that OEMs are investing more resources in servers; automotive products, including eMMC and UFS, highly overlap with enterprise-grade SSDs in some manufacturing processes, but have lower unit profits. While automakers can secure new supply by binding contracts on already agreed-upon deals, they face choices among OEMs across multiple industries.

After experiencing the last round of chip shortages, automakers have already begun to get involved in chip supply. In November 2021, Ford signed a non-binding cooperation agreement with GlobalFoundries, planning to increase chip supply and explore joint research and development. In July of this year, Ford also signed a long-term strategic customer agreement with Micron to arrange memory supply for its next-generation models, extending the cooperation to technological collaboration and manufacturing investment.

Supply guarantees are increasingly linked to long-term purchasing obligations. Micron disclosed in its June earnings report that its strategic customer agreements in the automotive industry are typically three years long and include purchase volume commitments with payment constraints. Original equipment manufacturers (OEMs) use these agreements to plan their investments and production, while automakers need to determine how many chips they will need over the next few years before launching their models.

These contracts shift some of the risk associated with sales forecasting to the buyer upfront. If sales of a vehicle fall short of expectations, the payment-bound procurement commitments must still be fulfilled, and the pre-locked materials may take longer to be utilized. While securing supplies, automakers also assume responsibility for assessing future demand earlier. Closer coordination is needed between vehicle launches, sales forecasts, and material procurement.

Automakers also need to prepare for a prolonged period of supply shortages.

Yu Jia, head of China technology research at UBS Securities, recently told Wall Street News that the tight global supply and demand for DRAM may continue until the second quarter of 2028, while NAND Flash will remain tight until at least the fourth quarter of 2027. From ordering equipment to installation and commissioning, it takes at least two quarters, and the shortage of upstream components will also constrain capacity expansion.

During this period, automakers will continue to put new models into production to secure supplies for the next batch of products.

reallocation of costs

Automakers are also adjusting their technological solutions to reduce the amount of storage space needed per vehicle. Some of the technologies that can be used to reduce costs today were already being implemented several years ago.

Solutions integrating cockpit and driver assistance systems, such as those by Qualcomm, were finalized three years ago. By June of this year, vehicles equipped with the relevant platform were already on the road. Integrating these two types of functions into a single chip reduces redundant memory configurations. The designs previously developed for this integration are now also helping customers cope with rising storage prices.

Adjustments to existing vehicle models are constrained by existing platforms. A study by S&P Global Mobility in May of this year pointed out that some cockpit and driver assistance platforms designed several years ago and still in production rely on earlier generations of DRAM, and are facing a shrinking supply of options. The range of replaceable memory devices is limited by which processors support them; replacing devices also requires adaptation and verification. Automakers' current engineering adjustments must start from existing solutions.

An executive from a leading emerging electric vehicle company revealed that the company initiated a project in the first quarter to adapt its self-developed chips to products from more memory manufacturers. The benefits of automakers developing their own chips are beginning to emerge.

Cost pressures have also prompted automakers to leverage their accumulated R&D resources in other areas. Li Xiang, Chairman and CEO of Li Auto, stated at the Q2 earnings conference that the company will not pass on rising costs for batteries and memory chips to consumers, but will instead mitigate the pressure through enhanced self-developed batteries, integrated design, and cost management.

Recently, Li Auto announced that it will gradually roll out its self-developed batteries to all its models and plans to invest an additional 2.65 billion yuan in Sunwoda Power. Li Auto leads the R&D, while manufacturing is outsourced to partners. This integrated development of batteries and vehicles allows the company to manage energy consumption, thermal management, and hardware costs. Li Auto hopes to offset the increased costs of battery and electric drive systems by saving on expenses related to these areas.

Automakers need to recoup the R&D costs they spend on chips and batteries through sales over the next few years. The savings in hardware expenditures during mass production are one aspect; furthermore, automakers can continue to adjust material and system costs through their own R&D efforts after procurement prices change.

In a market where it is difficult to pass on price increases to consumers, these adjustments leave automakers with room to absorb costs internally.

Automakers will continue to advance their in-house research and development, while also introducing more suppliers and increasing alternative sources of supply to reduce reliance on a few large suppliers. With adjustable technical solutions and a wider range of supply channels, automakers will be less vulnerable to the next round of price and supply fluctuations.

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