DONGGUAN, China (Reuters) -The factory next to a weedy field in China’s southern industrial zone has become a global choke point for automotive chips, upending an industry that only a few years ago vowed it would never again be plagued by supply chain disruptions.
Automakers have vowed to strengthen supply lines after Covid-19 disrupted semiconductor production in 2020 and a factory fire in Japan a year later exacerbated the shortage. But the crisis that shook Dutch chipmaker Nexperia’s plant exposed a blind spot: The industry never predicted that low-tech chips would become China’s leverage against the West.
“No one was prepared for geopolitical disruption, and they still are not,” said Ambrose Conroy, CEO of the US firm Seraph Consulting, which advises automakers.
The Dutch government took control of Netherlands-based Nexperia in late September, citing concerns that its technology could be transferred to Chinese owner Wingtech. Beijing retaliated by halting exports of finished Nexperia chips packaged at the plant in the Pearl River Delta.
The Netherlands signaled a potential breakthrough last week by abandoning its decision to take control of Nexperia.
From its Dongguan factory, Nexperia ships semiconductors used in everything from car brakes to power windows. They sell for well under a penny apiece, but the shortage has forced Nissan and Honda to cut production and German supplier Bosch to cut factory hours.
This account of how the industry is scrambling to respond to the unforeseen crisis is based on interviews with a dozen people, including auto executives, suppliers and chip distributors, who describe how just-in-time inventory practices and limited supply chain diversification leave automakers vulnerable to geopolitical shocks.
The report shows how China’s dominance extends beyond cutting-edge technology and rare earths to ordinary but critical components, and how Beijing is using this power to cripple global production. Some details had not previously been reported, including the size of Bosch’s exposure and its struggle with requirements for companies to trade in yuan.
The Dutch government took control of the headquarters in Nijmegen, while operations in China remained under the control of Nexperia’s Chinese parent company.
“The Dutch thought they had captured Nexperia, but they only captured 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 they are dependent on China, even in the middle and lower segments. If China wants to control you, it can still do it. You have no way out.”
Wingtech has become an industry leader since its acquisition of Nexperia, a spokesperson said in a statement. “The current crisis shows that the fragmentation of international companies is damaging supply chains and putting key industries at risk,” the spokesman said.
China’s Ministry of Commerce did not respond to requests for comment.
A Nexperia spokesman said the global complexity of the semiconductor industry makes it difficult to predict the impact of geopolitics.
CASE STUDY FOR POLITICAL RISK
A person at the automaker said Nexperia’s chips were seen as so cheap and accessible that a European automaker “does not normally prepare alternative materials.” The chips are “low-priced, very ordinary electronic products,” said this person, who, like many of those interviewed, spoke on the condition of anonymity to discuss sensitive information.
Alfredo Montufar-Helu, managing director of Ankura Consulting in Beijing, said the Nexperia episode showed that manufacturers’ strategic vulnerability extends beyond high-tech components.
Although Bosch orders 200 million euros ($231 million) worth of Nexperia products a year, it initially did not have enough alternatives, 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 to be made in yuan rather than the foreign currencies previously used. The currency change was an apparent bid by the Chinese business to operate more independently from its Dutch headquarters, Reuters reported. The Dongguan facility accumulated chips ready to be shipped because it could not handle all yuan transactions, according to two people briefed on the matter.
They said the situation has since eased.
A Wingtech spokesman said there were no chip backlogs or system issues related to yuan payment, but did not provide details.
China allowed the resumption of some Nexperia exports this month after US President Donald Trump met with China’s Xi Jinping in Seoul. This comes just in time for Bosch and suppliers Aumovio, ZF Group and Hella, which are days away from halting some production, according to a person with knowledge of the matter.
Bosch, Aumovio and ZF declined to comment. A Hella spokesman said the supply chain remained stable.
When Reuters visited the Dongguan facility last week, some curtains were drawn and trucks came and went from the docking area. Dozens of scooters were parked outside.
Melecs of Austria and Apple supplier JABIL was able to source chips from Nexperia. Both allowed them to settle in yuan using Chinese assets, two people briefed on the matter said.
A spokesman for Melecs declined to comment. JABIL did not respond to multiple requests for comment.
AUTOMOBILES HAVE NOT LEARNED A LESSON
Julie Boote, an auto analyst at Pelham Smithers Associates in London, said the chip shortage showed automakers had not learned the lessons of the previous shock.
“You would expect them to have several months of chip supply stock,” he said. “That’s what they said after the last crisis.”
Nissan Performance Director Guillaume Cartier said it takes time to replace vulnerable supply chains.
“I know everyone will say to me, ‘Oh, but you haven’t learned from the past,'” he told Reuters last month. “Yes, okay. So do you believe you will replace all your equipment in three years?”
The Nexperia shortage has forced Nissan to reduce production of its best-selling Rogue SUV and poses an ongoing risk for this year, Reuters reported.
Consultant Conroy advises customers to keep extra inventory of critical components in the area 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 have been flogged.
According to Reuters, Toyota instructed suppliers to stockpile chips for several months as part of a business continuity plan developed after the devastating Japan earthquake in 2011.
A Toyota spokesman said there were risks that could affect vehicle production and they would continue to monitor developments closely.
COST OF RESISTANCE
Another speed increase in supply was related to how chips were integrated into vehicles. Nexperia semiconductors are widely used in components such as power modules that manage electricity and are often soldered directly to the components. That means they can’t be replaced with another chip, said Nori Chiou, investment director at White Oak Capital Partners.
Any new vehicle component must undergo testing, which can add months to the process of securing alternative parts, Chiou said. A spokesman for Nexperia said the change could not be completed “overnight” because parts that look the same can perform differently in vehicles.
Germany’s Hella is considering alternative suppliers for Nexperia 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 spokesman said a switch had been made to “already qualified secondary sources wherever possible” to maintain stable supply.
Ankura Consulting’s Montufar-Helu said preparing for chip choke points won’t be easy or cheap.
“Everyone will once again start talking about building resilience and diversification,” he said. “And then they’ll 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; 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.)
