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China's dominance of supply chains extends to mundane

components, impacting global production

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Automakers failed to learn from past supply chain

disruptions,

experts say

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Dutch government reversed control of Nexperia, signaling

potential breakthrough

By Reuters staff

DONGGUAN, China, Nov 24 (Reuters) - A factory next to a

weed-ridden lot in China's industrial south has become a global

choke point for automotive chips, upending a sector that just a

few years ago swore it wouldn't be caught again by supply-chain

disruptions.

Automakers vowed to strengthen supply lines after COVID-19

snarled semiconductor output in 2020 and a Japanese factory fire

aggravated the shortage a year later. But the crisis engulfing

Dutch chipmaker Nexperia's plant exposed a blind spot: The

industry never envisioned low-tech chips would become a lever

for China against the West.

"No one prepared for geopolitical disruption, and they're

still not 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, citing concerns its technology could be

passed on 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 from its decision to

take control of Nexperia, signalling 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, yet the shortage forced Nissan ( NSANF ) and

Honda ( HMC ) to cut production and drove German supplier Bosch to

curtail factory working 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

cutting-edge technology and rare earths to mundane-yet-critical

components and how Beijing wields that power to paralyse global

production. Some details, including the size of Bosch's exposure

and companies' struggles with requirements to trade in yuan,

haven't previously been reported.

While the Dutch government took control of the headquarters

in Nijmegen, the operations in China remained under the control

of Nexperia's Chinese parent.

"The Dutch thought they had seized Nexperia, but they only

took over 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-end segments,

they depend on China. If China wants to get a grip on you, it

still can. You have no way out."

In a statement, a spokesperson for Wingtech said Nexperia

has become an industry leader since being acquired. "The current

crisis shows that breaking up international companies harms

supply chains and puts key industries at risk," the spokesperson

said.

China's commerce ministry didn't respond to requests for

comment.

A Nexperia spokesperson said the semiconductor industry's

global complexity made it hard to foresee the impact of

geopolitics.

CASE STUDY FOR POLITICAL RISK

Nexperia's chips were seen as so cheap and available that

one European automaker didn't normally prepare alternative

supplies, said one person at the carmaker. The chips are "very

ordinary electronics with low prices," said this person, who

like most of those interviewed spoke on condition of anonymity

to discuss sensitive information.

The Nexperia episode shows that manufacturers' strategic

vulnerability stretches beyond high-tech components, said

Alfredo Montufar-Helu, a managing director at Ankura Consulting

in Beijing.

Bosch didn't initially have sufficient alternatives ready,

despite ordering 200 million euros ($231 million) worth 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 foreign

currencies used previously. The currency change was an apparent

bid by the Chinese business to operate more independently of

Dutch headquarters, Reuters has reported. Ready-to-ship chips

piled up at the Dongguan plant because it wasn't able to handle

all the yuan transactions, according to two people briefed on

the matter.

The situation has since eased, they said.

A Wingtech spokesperson said there hadn't been a chip

backlog or systems issues with yuan payment, but didn't

elaborate.

China allowed some Nexperia exports to resume this month

after U.S. President Donald Trump met with China's Xi Jinping in

Seoul. That came just in time for Bosch and suppliers Aumovio,

ZF Group and Hella, which were days away from halting some

production, according to a person briefed on the matter.

Bosch, Aumovio and ZF declined to comment. A Hella

spokesperson said it has maintained supply-chain stability.

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.

Austria's Melecs and Apple supplier JABIL ( JBL ) have managed to

source chips from Nexperia. Both have used Chinese entities,

allowing them to settle in yuan, the two people briefed on the

matter said.

A Melecs spokesperson declined to comment. JABIL ( JBL ) did not

respond to multiple requests for comment.

AUTOMAKERS DIDN'T LEARN LESSON

The chip shortage showed automakers hadn't heeded lessons

from the previous shock, said Julie Boote, autos 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 ( NSANF ) Chief Performance Officer Guillaume Cartier said

replacing vulnerable supply chains takes time.

"I know what everyone will tell me, 'Ah, but you didn't

learn from the past,'" he told Reuters last month. "Yeah, OK.

But do you believe you change all your supply in three years?"

The Nexperia shortage forced Nissan ( NSANF ) to cut production of its

top-selling Rogue SUV, Reuters has reported, and poses a

continuing risk for this year.

Conroy, the consultant, advises clients to hold extra

inventory of critical components in the region where they're

needed. That's a costly change for an industry that relies

on "just-in-time" inventory management to minimize costs.

Not all carmakers got whiplashed.

Toyota ( TM ) instructs suppliers to stockpile several months' supply

of chips as part of the business continuity plan developed after

the devastating 2011 Japan earthquake, Reuters has reported.

A Toyota ( TM ) spokesperson said there were risks that could

impact vehicle production and they would continue to monitor

developments closely.

THE COST OF RESILIENCE

Another supply speedbump involved how chips are integrated

into vehicles. Nexperia semiconductors are widely used in

components like power modules, which manage electricity, and are

often soldered straight onto the components. That means they

can't just be swapped out for another chip, said Nori Chiou,

investment director at White Oak Capital Partners.

Any new vehicle component needs to undergo testing that can

add months to the process of securing alternative parts, Chiou

said. Nexperia's spokesperson said substitution can't be

completed "overnight" because parts that seem identical can

perform differently in 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 was shifting to "already

qualified second sources wherever possible" to maintain stable

supplies.

Ankura Consulting's Montufar-Helu said preparing for

chip choke points will not be easy - or cheap.

"Everyone is going to start talking once again about

building resilience, about diversification," he said. "And then

they're going to realise 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.)