Europe’s third-largest semiconductor company will join hands with a Chinese state-owned industrial group in a bet on the rise of Chinese carmakers and the future of hybrid and electric vehicles.

NXP Semiconductors of the Netherlands will form a joint venture with Datang Telecom to design and sell Chinese semiconductors for domestic carmakers, in a push to position itself as a local supplier in the world’s biggest car market by sales.

If there are two things the global automotive industry agrees on, they are the looming rise of Chinese carmakers and the proliferation of connected, high-tech vehicles – a big market for makers of semiconductors, which help control the flow of current in electrical devices.

NXP thinks it has found a way to capitalise on both trends, positioning itself as a local supplier hoping to tap a resurgence of domestic carmakers in a market mainly controlled by foreign brands.

“[The Chinese] clearly want to leapfrog the world,” said Kurt Sievers, NXP executive vice-president and head of its automotive division.

“[Datang] come from the telecoms side and they want to go into automotive. Our interest is that we bring the automotive to the party and we want to be more Chinese,” he said.

The joint venture brings together $20m of initial investment. The unit is expected to be operational in the new year, with sales to begin at the start of 2015, subject to state approvals.

It will not make the chips itself but will focus on research and marketing – a strategy that posed risks in a country where intellectual property theft created a “competitive environment”, Mr Sievers said.

Unlike carmakers, which have to enter China with a local partner, component companies are free to operate alone. NXP has partnered up anyway, giving Datang a 51 per cent controlling stake. This arrangement will enable the venture to take advantage of tax benefits, subsidies available to Chinese entities and preferential access to local carmakers, many of which are owned by the government.

Working with a state-owned company was “something we’ve got to watch and we’ve got to learn how to deal with”, said Mr Sievers. “We see it as a great opportunity to start with, but we have to see how we can manage it.”

NXP is also targeting an expected rise in demand for hybrid and electric cars in China, and a steady increase in in-car gadgets for entertainment and connectivity, all of which require semiconductors.

The Chinese government announced a new round of clean car subsidies in September as part of its effort to get 5m new energy vehicles on the road by 2020. It is an ambitious – if understandable – goal in a country grappling with some of the world’s worst air pollution.

But state support has so far failed to jump-start the market. Fewer than 30,000 hybrid or electric cars were in use at the end of last year, according to state media, and 80 per cent of those were buses.

China has become the largest car market and a growth story propping up the industry’s profits. However, the country’s own marques have so far failed to make a mark on the global industry, with foreign brands such as Volkswagen and General Motors benefiting most from the boom in Chinese demand.

That could change soon. Chinese carmakers own foreign brands such as Volvo and MG Rover, while state-owned Dongfeng is in talks to acquire a substantial stake in France’s Peugeot, amid a push for local players to flex their muscles.

“I clearly see a preference from local car companies to buy from a local supply chain,” said Mr Sievers.

He said the joint venture would increase the share of NXP’s revenues from China, where it has an 11 per cent share of the market in semiconductors.

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