(Corrects location of Trump-Xi meeting in paragraph 21 to Busan, not Seoul)
By Reuters Staff
DONGGUAN, China (Reuters) – A factory next to a weed-infested plot of land in China’s industrial south has become a global chokepoint for auto chips, upending an industry that just a few years ago was vowing never to be overtaken by supply chain disruptions.
Automakers pledged to shore up their supply lines after COVID-19 curbed semiconductor production in 2020 and a fire at a Japanese factory worsened the shortage a year later. But the crisis hitting Dutch chipmaker Nexperia’s factory has revealed a blind spot: the industry never imagined that low-tech chips would become leverage for China against the West.
“No one prepared for geopolitical disruption, and they still aren’t prepared,” said Ambrose Conroy, CEO of U.S. firm Seraph Consulting, which advises automakers.
The Dutch government took control of Netherlands-based Nexperia in late September amid concerns its technology could be passed on to Chinese owner Wingtech. Beijing retaliated by stopping exports of finished Nexperia chips packaged at the Pearl River Delta factory.
The Netherlands last week reversed its decision to take control of Nexperia, signaling a potential breakthrough.
From its factory in Dongguan, Nexperia ships semiconductors used in everything from car brakes to power windows. They “sell for fractions of a cent each, but the shortage has forced Nissan and Honda to cut production and pushed German supplier Bosch to reduce working hours at its factories.
This account of how the industry scrambled to respond to this unforeseen crisis is based on interviews with a dozen people, including auto industry executives, chip suppliers and distributors, who described how just-in-time inventory practices and limited supply chain diversification left automakers vulnerable to geopolitical shocks.
The report shows how China’s dominance extends beyond advanced technology and rare earths to mundane but critical components and how Beijing uses this power to cripple global production. Some details, including the scale of Bosch’s exposure and the companies’ difficulties meeting yuan trading requirements, had not been previously reported.
While the Dutch government took control of the headquarters in Nijmegen, operations in China remained under the control of Nexperia’s Chinese parent company.
“The Dutch thought they had taken over Nexperia, but they only took over an office building,” said Li Xing, a professor of international relations at the Guangdong Institute of International Strategies, a think tank.
“What this shows is that even in the mid- and low-end segments, they are dependent on China. If China wants to take over you, they still can. You have no way out.”
In a statement, a Wingtech spokesperson said Nexperia has become an industry leader since its acquisition. “The current crisis shows that the breakup of international companies damages supply chains and puts key sectors at risk,” the spokesperson said.
China’s Commerce Ministry did not respond to requests for comment.
A Nexperia spokesperson said the global complexity of the semiconductor industry made it difficult to predict the impact of geopolitics.
CASE STUDY ON POLITICAL RISK
Nexperia’s chips were considered so cheap and so available that a European automaker would not normally prepare alternative supplies, a person at the automaker said. Chips are “very ordinary, low-cost electronic devices,” said the person, who, like most of those interviewed, spoke on condition of anonymity to discuss sensitive information.
The Nexperia episode shows that manufacturers’ strategic vulnerability extends beyond high-tech components, said Alfredo Montufar-Helu, managing director of Ankura Consulting in Beijing.
Bosch initially did not have enough alternatives, despite annual orders worth 200 million euros ($231 million) of Nexperia products, according to a person with knowledge of the matter.
Bosch declined to comment.
Nexperia resumed sales to some domestic distributors in late October, but required payment in yuan, instead of the foreign currencies previously used. The currency change was an apparent attempt by the Chinese company to operate more independently from Dutch headquarters, Reuters reported. Chips ready for shipment piled up at the Dongguan factory because it was unable to handle all yuan transactions, according to two people briefed on the matter.
The situation has since improved,” they said.
A Wingtech spokesperson said there had been no chip delays or system issues with yuan payment, but did not give further details.
China allowed some Nexperia exports to resume this month after U.S. President Donald Trump met with China’s Xi Jinping in Busan. That came just in time for Bosch and its suppliers Aumovio, ZF Group and Hella, which were days away from shutting down some production, according to a person briefed on the matter.
Bosch, Aumovio and ZF declined to comment. A Hella spokesperson said the company had maintained the stability of its supply chain.
When Reuters visited the Dongguan factory recently, some blinds were drawn and trucks were coming and going from a docking area. Dozens of scooters were parked outside.
Austrian Melecs and Apple supplier JABIL have managed to source chips from Nexperia. Both used Chinese entities, allowing them to settle in yuan, said the two people briefed on the matter.
A Melecs spokesperson declined to comment. JABIL did not respond to multiple requests for comment.
CAR MAKERS HAVE NOT LEARNED THE LESSON
The chip shortage shows that automakers have not learned lessons from the previous shock, said Julie Boote, an auto analyst at Pelham Smithers Associates in London.
“You would expect them to have several months’ worth of chips on hand,” she said. “That’s what they said after the last crisis.”
Guillaume Cartier, Nissan’s chief performance officer, said replacing vulnerable supply chains takes time.
“I know what everyone will say to me: ‘Ah, but you haven’t learned from the past,'” he told Reuters last month. “Yeah, okay. But do you think you’ll have changed all your supplies in three years?”
The Nexperia shortage has forced Nissan to cut production of its best-selling Rogue SUV, Reuters reported, and is a continuing risk for this year.
Conroy, the consultant, advises clients to keep extra inventory of critical components in the region where they are needed. This is a costly change for an industry that relies on “just-in-time” inventory management to minimize costs.
Not all automakers were hit.
Toyota is asking its suppliers to stockpile several months’ worth of chips as part of the business continuity plan developed after Japan’s devastating earthquake in 2011, Reuters reported.
A Toyota spokesperson said there were risks that could impact vehicle production and it would continue to monitor developments closely.
THE COST OF RESILIENCE
Another supply hurdle involved how the chips are integrated into vehicles. Nexperia semiconductors are widely used in components such as power modules, which manage electricity, and are often soldered directly to components. That means they can’t simply be replaced with another chip, said Nori Chiou, chief investment officer at White Oak Capital Partners.
Any new vehicle component must undergo testing that can add months to the process of obtaining alternative parts, Chiou said. The Nexperia spokesperson said the substitution cannot be made “overnight” because parts that appear identical may function differently in vehicles.
Germany’s Hella is considering other suppliers for Nexperia’s chips, but testing and approvals could take up to a year, longer than initially expected, according to a person in the auto supply industry.
Hella’s spokesperson said the company was turning to “already qualified secondary sources wherever possible” to maintain stable supplies.
Montufar-Helu of Ankura Consulting said preparing for chip choke points won’t be easy — or cheap.
“Everyone is going to start talking about building resilience again, about diversification,” he said. “And then they’re going to realize how expensive it is.”
($1 = 0.8672 euros)
(Reporting by David Kirton and Nicoco Chan in Dongguan; Che Pan, Eduardo Baptista and Laurie Chen in Beijing, Zhang Yan in Shanghai; Fanny Potkin in Singapore; Daniel Leussink in Tokyo; Additional reporting by Ilona Wissenbach in Frankfurt, Toby Sterling in Amsterdam, Gilles Guillaume in Paris; Aditi Shah in Tokyo; Writing by David Dolan; Editing by David Crawshaw and Lincoln Feast.)
