How Did a Chinese Chip Maker Disrupt the Global Car Industry?

The Dutch government's recent invocation of a Cold War-era emergency law to take control of the Chinese-owned chip company Nexperia has sent ripples through the global motor industry. This extraordinary move, aimed at addressing governance issues within the company, has sparked tensions between the Netherlands and China, leading to significant disruptions in chip supply chains critical for automotive production. The situation highlights vulnerabilities in global supply chains and the ongoing geopolitical rivalry between the US and China.

Last updated: 21 October 2023 (BST)

What’s happening now

The Dutch government has taken a decisive step by assuming control of Nexperia, a company pivotal in the semiconductor industry, particularly for automotive applications. This action was prompted by reported governance shortcomings that the Economic Affairs Minister deemed a threat to the continuity of supply and safeguarding of critical technologies in both the Dutch and European economies. Following this announcement, Beijing reacted sharply, claiming political interference and imposing export controls on Nexperia chips produced in China, further complicating the already fragile supply chain landscape.

Key takeaways

• The Dutch government has invoked emergency powers to take control of Nexperia, citing "serious governance shortcomings".
• China has retaliated with export controls and halted shipments of Nexperia chips to Europe.
• This disruption highlights vulnerabilities within the global automotive supply chain and the dependency on Chinese manufacturing.

Timeline: how we got here

The situation surrounding Nexperia has evolved rapidly:

• September 2023: The Dutch government invokes Cold War-era emergency law to take control of Nexperia.
• Late September 2023: China imposes export controls on Nexperia chips, halting shipments to Europe.
• October 2023: Ongoing negotiations between the EU and China regarding the lifting of export controls on chips and rare earths.

What’s new vs what’s known

New today/this week

Recent developments include China's suspension of Nexperia chip exports and the Dutch government's statement reinforcing the necessity of the takeover for ensuring economic stability. Furthermore, Beijing's call for the EU to persuade the Netherlands to reverse its decision underscores escalating tensions.

What was already established

The importance of Nexperia in the semiconductor supply chain has been known for some time, especially its production of legacy chips critical for automotive safety and functionality. However, the governance issues and the subsequent intervention by the Dutch government have now brought these challenges into sharper focus.

Impact for the UK

Consumers and households

The disruption in chip supply chains could lead to delays in vehicle production, ultimately impacting availability and prices for consumers in the UK. As vehicles become increasingly reliant on technology, any hiccup in supply can lead to significant market fluctuations.

Businesses and jobs

For UK businesses, particularly those in the automotive sector, the Nexperia situation serves as a wake-up call to diversify supply chains. The reliance on a limited number of suppliers, especially those with geopolitical tensions, poses risks that could lead to job losses and financial instability.

Policy and regulation

UK policymakers will need to monitor the situation closely, as the implications of the Nexperia takeover could influence future trade agreements and regulations regarding technology and manufacturing sectors. Ensuring a stable supply chain may become a priority for governments navigating these complexities.

Numbers that matter

• 70-80% of Nexperia's output is sent to China for further processing.
• Approximately 300 different types of legacy chips are produced by Nexperia, essential for modern vehicles.
• The global automotive industry relies on an estimated 3 billion semiconductor units annually, underscoring the scale of dependency.

Definitions and jargon buster

• Nexperia: A semiconductor manufacturer known for producing essential chips for automotive and industrial applications.
• Legacy chips: Older semiconductor technologies that are crucial for various automotive functions but not at the cutting edge of technology.

How to think about the next steps

Near term (0–4 weeks)

In the coming weeks, companies in the automotive sector should assess their supply chains and consider alternative suppliers for critical components. Monitoring the developments in negotiations between the EU and China will also be crucial.

Medium term (1–6 months)

Long-term strategies may involve diversifying supply chains away from single-source dependencies and investing in local manufacturing capabilities to mitigate risks associated with geopolitical tensions.

Signals to watch

• Updates from EU-China negotiations regarding export controls and semiconductor flows.
• Market responses from automotive manufacturers regarding supply chain adjustments.
• Policy changes from the UK government in response to the semiconductor supply chain disruptions.

Practical guidance

Do

• Assess your current supply chain for vulnerabilities and consider diversifying sources.
• Stay informed about geopolitical developments that could impact your business.

Don’t

• Don’t rely solely on a single region or country for critical components.
• Don’t overlook the importance of building relationships with multiple suppliers.

Checklist

• Evaluate current supplier relationships for stability and reliability.
• Identify potential alternative suppliers and assess their capabilities.
• Stay updated on global trade policies and their implications for your business.

Risks, caveats, and uncertainties

The situation remains fluid, with numerous uncertainties surrounding the exact nature of Beijing's export controls and how they will affect both Nexperia and the wider semiconductor supply chain. Additionally, the responsiveness of the EU and its member states to these challenges remains to be seen, particularly in light of the complexities involved in international trade and geopolitical tensions.

Bottom line

The Nexperia takeover by the Dutch government underscores a growing trend of decoupling between Western countries and Chinese investments in strategic sectors. As the automotive industry grapples with these supply chain disruptions, businesses must adapt and explore new avenues for securing critical technology components. The implications are likely to resonate through the industry for years to come.

FAQs

What is Nexperia's role in the semiconductor industry?

Nexperia produces legacy semiconductors that are essential for automotive functions, making it a crucial player in the chip supply chain.

How has China reacted to the Dutch government's takeover?

China has reacted strongly, accusing the Netherlands of political interference and imposing export controls on Nexperia chips produced in Chinese facilities.

What are the implications for the UK automotive industry?

The disruption in chip supply chains poses potential risks to vehicle production in the UK, which could lead to higher prices and reduced availability for consumers.