Computing and control chips are mainly microcontrollers and logic ICs, including MCUs (Microcontroller Units) and SoCs (System on Chips), which are primarily used for computing, analysis, and decision-making.

Power chips are mainly used for converting electrical energy and controlling circuits, including MOSFETs (Metal-Oxide-Semiconductor Field-Effect Transistors) and IGBTs (Insulated Gate Bipolar Transistors).

Sensor chips are mainly responsible for sensing the operating conditions of automobiles and converting information into electrical signals.

The remaining chips are collectively classified as other types of chips.

ISO 26262 (functional safety standard for the design phase);

IATF 16949 (standard for the wafer fabrication and packaging phase);

AEC-Q series (standards for the certification and testing phase).

Computing and control chips need to pass the AEC-Q100 test;

Power chips need to pass the AEC-Q101 test;

Automotive optoelectronic devices need to pass the AEC-Q102 test;

Sensors need to pass the AEC-Q103 test.

Image Source: Jiuzhang Zhijia (a domestic automotive intelligence research institution)

In summary, based on the characteristics of automotive-grade chip projects—long vehicle installation cycles and high reliability requirements—the following key points should be focused on during the legal due diligence of such projects:

(I) Focus on the Number of Products That Have Passed AEC-Q Tests

Through the product roadmap provided by the company and the AEC-Q test reports of various part numbers, sort out and summarize the types of part numbers whose products have passed or failed the tests. Obtain the test reports of core product part numbers that have generated sales revenue. Pay attention to the main obstacles currently faced by products that have not passed the tests (e.g., whether there are defects in indicators such as power consumption and performance) and find out through industry interviews whether such obstacles can be eliminated in the future.

(II) Focus on the Specific Stage of the Company’s Products in the Automotive Supply Chain

During due diligence, attention should be paid to obtaining customer orders for various products and the company’s revenue details. Through interviews with the company’s sales personnel and major customers, understand:

The specific verification stage of the company’s products in the automotive field;

The verification results of lower-tier customers;

The number and content of model designations (i.e., fixed supply qualifications) obtained from various automakers (specifically, whether they are designated as "A-supplier" or "B-supplier");

The supply share for each designation.

(III) Focus on Customer Types and Refine the End Vehicle Models for Each Product

Some automotive-grade chips can be applied to both traditional fuel vehicles and new energy vehicles. During due diligence, customer structure and trend changes should trend changes should be analyzed based on different application scenarios, combining sales contracts and interview content. For example:

Analyze customers by examining the trends in the number and amount of sales contracts for segmented product application scenarios, categorized by traditional fuel vehicles and new energy vehicles;

On the other hand, refine and analyze the revenue from the company’s automotive-grade and non-automotive-grade products through the sales contract ledger. Based on the current business revenue structure, determine whether the enterprise can be classified as an automotive-grade chip design company.

In the due diligence of a certain automotive chip project, it was found that the main end vehicle model for a cockpit chip was a certain SUV model of QR. However, according to third-party evaluation websites, the monthly sales volume of this model was only a few hundred units. It was even possible to estimate the company’s revenue from this model based on this data, and no obvious trend of sales volume growth was observed.

(IV) Focus on Customer Stability

Generally, OEMs (Original Equipment Manufacturers) require chip enterprises to sign supply guarantee agreements. During due diligence:

On one hand, obtain the supply guarantee agreements signed by the company to analyze the stability of future customers;

On the other hand, pay attention to the company’s current wafer procurement situation (e.g., if advanced manufacturing processes are used, whether there are issues such as foundry security); check whether there are breach clauses in sales contracts for failure to deliver on time; and verify whether deliver on time; and verify whether there are minimum purchase volume commitments in upstream procurement contracts and whether such commitments match the company’s sales volume.

In addition, it is an industry practice that automakers require annual price reduction mechanisms from their upper-tier suppliers. Some automakers directly stipulate an annual price reduction mechanism of 3% or 4% in contracts; others, if not specified in contracts, directly implement price reductions during project bidding. For the existing annual price reduction mechanism, attention should be paid to:

Whether the chip enterprise passes on the price pressure to its own suppliers;

Assisting in determining whether the enterprise has achieved chip cost reduction through certain technical means.

At the same time, focus on the main reasons for the addition or reduction of customers among the top 10 customers of the enterprise in the past three years, whether there are customer losses due to delayed delivery or substandard quality, and whether there are major compensation clauses in agreements due to chip quality issues.

(V) Focus on Sales Models and Payment Collection Policies

As an automotive chip supplier, the sales model is generally dominated by distribution. Under the distribution model, the following points require focus:

Whether the distribution is of the "buyout" type;

When reviewing distribution agreements, focus on whether there are clauses such as unconditional return of goods for distributors;

Verify whether distributors with a large proportion of operating revenue are related parties of the company;

Pay attention to the signing dates of large-value distribution contracts to check for fraudulent practices such as signing sales contracts at the end of the year to inflate revenue.

On the other hand, focus on the payment collection methods and credit periods in sales contracts. Since automakers and Tier 1 suppliers have strict management over procurement settlement, direct or lower-tier suppliers of automakers will face certain capital advance pressures. In the due diligence of a certain project, it was found that automakers generally make payments to upstream suppliers 3-6 months after goods are received. This information can be cross-validated with the company’s bad debts and accounts receivable turnover days in financial due diligence.

Correspondingly, attention should also be paid to the safety of the project company’s cash flow, the overall pace of equity and debt financing, and the utilization of bank credit lines to avoid adverse consequences such as the company being unable to operate effectively due to cash flow shortages.

In addition to the above key points of due diligence, since automotive-grade chips face challenges such as high development difficulty, fierce market competition, and slow localization progress of high-end chips, special attention should also be paid to the professional background of the technical team. Auxiliary judgments can be made by examining:

Whether the team has experience in successfully mass-producing chips;

Whether the team’s compensation is competitive.

When determining the independent controllability of the company’s core technologies, for example, in power semiconductor projects, additional attention can be paid to whether the company’s foundry model is COT (Customer Own Tooling) or FOT (Foundry Own Tooling), and the ownership of the PDK (Process Design Kit) can be auxiliary judged in combination with the technical team.

In summary, when selecting automotive-grade chip projects, the following core elements need to be focused on and verified:

The reliability of the automotive-grade chips;

Whether there is stable mass shipment (e.g., whether the total shipment volume has reached the KK level, i.e., 100,000 units);

Whether the products with stable shipments are automotive-grade chips;

Whether there are multiple verifiable vehicle models with the chips installed.

In addition to focusing on the risks of the project itself, it is also necessary to understand the current status of other companies in the same industry, the overall industry environment, and whether there are restrictive adverse factors in the upstream and downstream of the industrial chain, so as to avoid the wrong investment misunderstanding of "seeing only trees but not the forest".

Source: Zhang Zheng, Compliance Management Department

Review: Xue Yao

Release: You Yi