Europe’s carmakers became hooked on Chinese chips. Now they can’t get them

A sudden shortage of Chinese-made microchips led German automotive giant Volkswagen to warn workers of potential stoppages - Jens Schlueter/Getty Images Europe

The modern car is made up of thousands of components. But a shortage of just one can be enough to bring production to a halt.

On Wednesday, German automotive giant Volkswagen (VW) warned workers of potential stoppages in the coming weeks as it grapples with a sudden shortage of Chinese-made microchips.

And it’s not just VW. The issue is threatening to engulf nearly all carmakers as nearly all of them depend on the same Chinese chips, one way or another, the European Automotive Manufacturers’ Association (ACEA) has warned.

The cause of the fuss? A bitter row between the European and Chinese divisions of major semiconductor company Nexperia, which has brought the flow of chips to a halt.

The bust up follows a decision by the government of the Netherlands to remove Nexperia’s Chinese leadership and take control of the company last week amid concerns about national security.

In response, Chinese staff at Nexperia were told to ignore instructions from the group’s Dutch head office and China has curbed shipments of the vital chips to Europe.

This is a major problem, because Nexperia, which is owned by Jiaxing-based Wingtech, makes chips in Europe but then sends them to China to be finished and packaged.

Overall, Nexperia accounts for around two fifths of the transistors and diodes used by the automotive industry, according to research company TechInsights.

But even this large figure underplays the significance of its chips, which are relatively simple but ubiquitous in the electronics of modern vehicles.

Carmakers do not buy them directly. Instead, the chips are part of printed circuit boards (PCBs) that go into hardware for systems for electronic windows, seat adjustment mechanisms or many other electric components such as knobs and dials on the dashboard.

“It could almost be any of the electronics in the car,” explains Ian Riches, of TechInsights.

“But the car manufacturers themselves have very limited visibility as to how exposed they are, because they’re not purchasing these chips directly.

“And these are parts that sell for cents, not dollars. So Nexperia ships huge volumes of them but they’re relatively low value.

“That tends to mean it is the sort of thing you don’t think about until it goes wrong.”

‘War rooms’

The fact things had gone badly wrong quickly became clear on October 10 when Nexperia notified customers that it was “no longer able to guarantee delivery of their chips”.

Since then, carmakers have set up “war rooms” to find potential solutions and are urging the Hague and Beijing to find a diplomatic solution urgently.

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For the automotive industry it is yet another unwelcome crisis in a year where the sector has also been battered by Donald Trump’s imposition of trade tariffs and China has threatened to choke off supplies of rare earth magnets that are also used for cars.

In Britain, the Society of Motor Manufacturers and Traders has warned of severe consequences if the chips don’t start to flow again.

“Another semiconductor chip shortage is the last thing the global automotive industry needs. While the sector has made efforts to diversify its supply chains, if not resolved quickly, this issue has the potential to severely disrupt vehicle production and market supply,” it said.

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The Nexperia row has echoes of the chip shortage that struck carmakers during the Covid pandemic, when suddenly companies found they couldn’t get hold of supplies fast enough as the economy reopened.

“The auto industry shut down, and cars weren’t getting made, and so the auto industry turned around to its semiconductor partners and said ‘we don’t need your stuff for a while’,” says Riches.

“Then everyone went home and started buying laptops and games consoles and certain areas of the semiconductor industry absolutely boomed, so capacity got switched over to non-automotive lines.”

After automotive companies suddenly started demanding chips, the ensuing shortage forced temporary shutdowns.

But this shortage is different, because it isn’t self-inflicted. Instead, it is a reminder that sourcing components from China is more risky than it used to be.

Nexperia’s halt on exports could damage the Chinese car industry as well as the Europe’s, argues Riches, but the damage will be more pronounced in the continent.

Andrew Bergbaum, an automotive expert at consultancy AlixPartners, said automotive groups were battling to find alternatives.

“Car companies are standing up the chip war rooms that they created during the pandemic,” he says. “You only need one component to be unique to Nexperia and that means that the whole PCB can’t be delivered.

“What they do know, however, is that once you take out a huge amount of capacity from the market, regardless of whether it’s interchangeable or not, the whole supply chain enters a bullwhip.”

Should the dispute drag on, design changes to remove the Nexperia chips are possible. Car companies argue they already tried to mitigate supply chain risks following the pandemic chip shortages.

Preparing for geopolitics

Many are also increasingly stockpiling certain components as well to try to mitigate supply shocks.

Swapping out Chinese components entirely is possible but – in an industry that prides itself on being global and highly efficient – that could end up making cars everywhere more expensive.

“Carmakers are having to come up with more local supply chains and are moving from ‘just in time’ to ‘just in case’,” says Bergbaum.

Mr Bergbaum added: “The implications of that are massive. The speed that the companies can go at depends on the refresh cycle of the cars they bring to market, but undoubtedly as you take away those economies of scale and localise things, by definition, you are making it less efficient.”

Still, carmakers are now becoming increasingly prepared for geopolitics to become a bigger risk to production.Swapping out Chinese components could end up making cars more expensive worldwide - Krisztian Bocsi/Bloomberg

The Dutch takeover of Nexperia’s operations reportedly came after US authorities raised concerns about Zhang Xuezheng, the company’s chief executive, remaining in post.

Soon afterwards, the Hague invoked Cold War-era laws citing “major shortcomings that could jeopardise security of supply” of microchips to Europe.

Dutch and Chinese officials have since held talks in a bid to end the standoff. But Beijing’s officials were not in a conciliatory mood, accusing their European counterparts of overstretching the definition of national security.

“Measures taken by the Dutch side regarding Nexperia Semiconductor have seriously affected the stability of global industrial and supply chains,” the Chinese commerce ministry said in its statement.

Now, VW’s warning to staff suggests automotive bosses fear the crisis is far from being resolved.

“I think this could be a short crunch, and hopefully wiser heads will prevail,” says Riches at TechInsights.

“But there are bigger games at play here than just whether a car gets made or not. And that’s the danger – if it gets caught up in something larger, maybe it could drag on.

“In the Covid crisis, it truly was structural and even with the best will in the world, they just couldn’t turn the taps back on again. This is entirely political, and the taps could be turned back on tomorrow with the stroke of a pen.”

For now, it means geopolitics is just as crucial to the modern car as the microchip.

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