DONGGUAN, China (Reuters) – A factory next to a weed-built lot in China’s industrial south has become a global choke point for auto chips, bringing down a sector that only a few years ago vowed not to be caught again by supply chain disruptions.
Automakers have vowed to bolster supply lines after COVID-19 disrupted semiconductor production in 2020 and a Japanese factory fire exacerbated shortages a year later. But the crisis that engulfed the Dutch chip maker Nexperia’s plant revealed a blind spot: The industry never predicted 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 US firm Seraph Consulting, which advises carmakers.
The Dutch government took control of Netherlands-based Nexperia in late September, citing concerns that its technology could be handed over to Chinese owner Wingtech. Beijing retaliated by halting exports of finished Nexperia chips packaged at the plant in the Pearl River Delta.
The Netherlands last week reversed course on its decision to take control of Nexperia, signaling a potential breakthrough.
From its Dongguan factory, Nexperia ships semiconductors used in everything from car brakes to electric windows. They sell for fractions of a penny each, but the shortage has forced Nissan and Honda to cut production and prompted German supplier Bosch to reduce factory hours.
This account of how the industry scrambled to respond to the unforeseen crisis is based on interviews with a dozen people, including auto executives, suppliers and chip distributors, who described how just-in-time inventory practices and limited supply chain diversification left automakers vulnerable to geopolitical shock.
The reporting shows how China’s dominance reaches beyond advanced technology and rare earths to mundane but critical components and how Beijing uses that power to cripple global production. Some details, including the size of Bosch’s exposure and the companies’ struggles with the requirements for trading in the yuan, have not been reported before.
While the Dutch government took control of the headquarters in Nijmegen, operations in China remained under the control of Nexperia’s Chinese parent.
“The Dutch thought they seized Nexperia, but they only took an office building,” said Li Xing, a professor of international relations at the Guangdong Institute for International Strategies, a think tank.
“What this shows is that, even in mid- and low-level segments, they depend on China. If China wants to get hold of you, it still can. You have no way out.”
In a statement, a spokesperson for Wingtech said that Nexperia has become an industry leader since it was acquired. “The current crisis shows that the collapse of international companies damages supply chains and puts key industries at risk,” the spokesman said.
China’s Ministry of Commerce did not respond to requests for comment.
A spokesman for Nexperia said that the global complexity of the semiconductor industry made it difficult to predict the impact of geopolitics.
A CASE STUDY FOR POLITICAL RISK
Nexperia’s chips were considered so cheap and available that one European carmaker would not normally prepare alternative supplies, said one person at the carmaker. The chips are “very ordinary electronics at low prices,” said this person, who like many of those interviewed spoke on condition of anonymity to discuss sensitive information.
The Nexperia episode shows that the strategic vulnerability of manufacturers extends beyond high-tech components, said Alfredo Montufar-Helu, managing director at Ankura Consulting in Beijing.
Bosch initially did not have enough ready alternatives, despite ordering 200 million euros ($231 million) of Nexperia products a year, 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 previously used foreign currencies. The currency change was an apparent bid by the Chinese business to operate more independently from the Dutch headquarters, Reuters reported. Chips ready to ship piled up at the Dongguan plant because it was unable to handle all yuan transactions, according to two people briefed on the matter.
The situation has since eased, they said.
A Wingtech spokesman said there was no chip backlog or system problems with yuan payment, but did not elaborate.
China allowed some Nexperia exports to resume this month after US President Donald Trump met with China’s Xi Jinping in Seoul. This came just in time for Bosch and suppliers Aumovio, ZF Group and Hella, who were days away from stopping some production, according to a person informed about the matter.
Bosch, Aumovio and ZF declined to comment. A Hella spokesman said it maintained the stability of the supply chain.
When Reuters visited the Dongguan plant on a recent weekday, some blinds were drawn and trucks came and went from a docking area. Dozens of scooters were parked outside.
Melecs of Austria and Apple supplier JABIL managed to acquire chips from Nexperia. Both used Chinese entities, which allowed them to settle in yuan, said the two people briefed on the matter.
A Melecs spokesman declined to comment. JABIL did not respond to multiple requests for comment.
THE AUTOMAKERS DID NOT LEARN THEIR LESSON
The failure of the chip showed that carmakers have not heeded the 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 supply inventory for chips,” she said. “That’s what they said after the last crisis.”
Nissan Chief Performance Officer Guillaume Cartier said that 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. “Yes, OK. But do you believe in replacing your entire supply in three years?”
The failure of Nexperia forced Nissan to cut production of its best-selling Rogue SUV, Reuters reported, posing a continuing risk for this year.
Conroy, the consultant, advises customers to keep an excess inventory of critical components in the region where they are needed. That’s a costly change for an industry that relies on “just-in-time” inventory management to minimize costs.
Not all automakers have been whiplashed.
Toyota instructs suppliers to store a supply of chips for several months as part of the business continuity plan developed after Japan’s devastating earthquake in 2011, Reuters reported.
A Toyota spokesperson said that there were risks that could have an impact on vehicle production and that they would continue to monitor developments closely.
THE COST OF RESILIENCE
Another supply speedbump involved how the chips are integrated into vehicles. Nexperia semiconductors are widely used in components such as power modules, which handle electricity, and are often soldered directly onto the components. That means they can’t just be swapped out for another chip, said Nori Chiou, director of investment at White Oak Capital Partners.
Any new vehicle component needs to go through tests that can add months to the process of securing replacement parts, Chiou said. The Nexperia spokesperson said that the replacement cannot be completed “overnight” because parts that look identical can work differently in the vehicles.
Germany’s Hella is considering alternative suppliers for Nexperia’s chips but testing and approvals could take up to a year, longer than initially expected, according to one person in the auto supply industry.
Hella’s spokesperson said it is switching to “secondary already qualified 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 will start talking again about building resilience, about diversification,” he said. “And then they will 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 Sterling in Paris; Aditi Shah in Tokyo;
