Chips Shortage Fuels Wave of Smuggling Attempts Into China

The roughly 800-mile border between China and Vietnam has long been the site of illicit exchange. Abducted women and children, trucks full of pigs, and rare wildlife have been some of the most frequent examples of smuggling operations in past decades. But affected by the pandemic and global logistics complications, computer chips have become the latest precious cargo.

Local authorities in the Chinese village of Aidian, one of the border’s several dozen legal crossing and trading points, announced earlier this month that they had conducted an operation to catch a gang that had been smuggling electronic components from Vietnam. Among the four suspects arrested, two were staff members in the checkpoint’s pandemic control workforce.

If pulled off, such ventures can be lucrative. One recent report suggested that, in some circumstances, relatively simple automotive chips could now fetch roughly 500 times higher prices than before the pandemic.

When the coronavirus struck in early 2020, there was a massive wave of purchases for electronic devices, as a significant proportion of the global workforce shifted to a work-from-home model. This was compounded by unprecedented strains to the international logistics system, resulting in a dearth of computer chips that has yet to be fully resolved.

In China, this has resulted in the emergence of a shadow economy in which middlemen facilitate the delivery of scarce electronic components to manufacturers. Tight production deadlines often encourage firms to pay a premium for chips that wouldn’t have been worth much at all prior to the crisis.

When attempting to illegally transport chips into China, smugglers essentially use two channels: overland via Vietnam or from Hong Kong and Macau.

On November 25, a woman was arrested in the southern city of Zhuhai for attempting to bring hundreds of undeclared computer chips into the Chinese mainland. Her strategy involved concealing the contraband inside a fake pregnancy bump, the size of which raised eyebrows as the woman claimed to only be five or six months pregnant.

Earlier this year, Chinese customs authorities announced that they had seized 160 CPUs and 16 foldable smartphones taped to the body of a man attempting to enter China through the Gongbei Port connecting Macau with the mainland. The CPUs were reportedly 11th and 12th-generation Intel products, advanced versions of which have recommended retail prices of as much as $589 apiece.

An image of contraband chips and electronic parts uncovered recently at a remote border crossing between China and Vietnam. (Image: Guangxi County Economic Network)

In July, Shenzhen authorities arrested an individual trying to smuggle chips, hard drives and smartphone motherboards into China, with a combined market value estimated at over 5 million yuan ($715,339).

Whether brought in overland via Vietnam or from the southern gateway cities of Hong Kong and Macau, the surge in smuggling attempts is unlikely to cease quickly. Throughout the next few years, China’s chips crunch is likely to face its greatest test yet, as recently introduced US regulations take their toll.

In early October, the Biden administration announced sweeping new restrictions on exports of advanced semiconductor technology to China. The chips targeted include advanced processors manufactured by firms such as Intel and Nvidia, and the rules also prohibit foreign firms such as Samsung and TSMC from producing semiconductors for companies based in mainland China.

Tufts University professor and chips industry expert Chris Miller has said regulation is unlike any policy introduced since the Cold War era. He characterized the US approach in a recent Wired article as “throwing sand in the gears.”

China’s burgeoning and highly competitive automotive sector has been hit the hardest by the chips crisis. Many of the domestic industry’s young forces, such as Nio and XPeng, have admitted the challenge of meeting their production goals this year as a result of the shortage.

“Suddenly you couldn’t buy a car because the company couldn’t get a chip that was critical to the functioning of the vehicle, said Paul Priolo, a senior policy expert, during a recent online event. “The global semiconductor shortage really… brought forward the importance of semiconductors in everything we do, from education online, work online, and entertainment online.”

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Nasdaq-listed Li Auto, which was established just seven years ago, has reportedly been forced to turn to the secondary market for semiconductors, paying more than $500 for a single brake chip that would have been roughly $1 before the industry’s woes began a few years ago.

Meanwhile, amid a slump in sales and production among many of China’s leading automotive firms, Shenzhen-based BYD has been silently surging. It has benefited greatly from its efficient supply chains and supply of self-produced chips, giving it a degree of self-sufficiency that enables it to weather storms that gather in the broader market.

In the first 11 months of 2022, BYD shipped about 800,000 electric vehicles, two times higher than the previous year and quickly catching up with global powerhouse Tesla, which announced over 900,000 units shipped in the first nine months of the year.

Chinese authorities have been aggressively pumping money into the domestic semiconductor industry in an attempt to salvage production and shore up its national security. Until it catches up, however, the grey market for chips and the smuggling of undeclared electronic components into the mainland are likely to persist.