Inside the Nexperia crisis: the future of chip supply chain | China Future Tech webinar

Key Concepts

Nextchip Crisis: The central issue discussed, involving the Dutch government's intervention in the ownership and control of the Dutch chip company Nexperia, which is owned by Chinese company Wingtech.
Goods Availability Act (Netherlands): A Dutch law that allows the government to intervene in the sale of strategic assets to protect national security or public order.
Enterprise Chamber (Dutch Commercial Courts): A Dutch court that handles corporate disputes, including cases of mismanagement and shareholder rights.
Legacy Chips: Older, less advanced semiconductor chips, as opposed to cutting-edge high-tech chips. Nexperia primarily produces legacy chips.
Wingtech: The Chinese company that acquired Nexperia.
Jan-Willem van den Wall: Former CEO of Nexperia, removed by the Enterprise Chamber.
Geopolitical Tension: The overarching context of rivalry between the US and China, which significantly influences global supply chains and international business.
US Export Controls (50% Subsidiary Rule): US regulations that restrict the sale of certain technologies to companies that are significantly owned or controlled by entities from targeted countries, particularly China.
Decoupling: The process of separating economic and technological ties between countries or regions, driven by geopolitical concerns.
Supply Chain Resilience: The ability of a supply chain to withstand disruptions and maintain operations.
Strategic Autonomy (Europe): The concept of Europe seeking to reduce its dependence on both the US and China for critical technologies and supply chains.
Dongan Factory: Nexperia's major chip manufacturing facility in China, responsible for a significant portion of its global output.
Wafer Fabrication: The process of creating semiconductor wafers, the base material for chips.
Automotive Chips: Semiconductor chips used in vehicles, typically larger and less complex than those used in smartphones.

Nexperia Chip Supply Chain Crisis: A Deep Dive

This discussion delves into the complex geopolitical and economic factors surrounding the Nexperia chip supply chain crisis, focusing on the dispute between the Dutch government and its Chinese owner, Wingtech. The core of the issue lies in the Dutch government's intervention in Nexperia's operations, ostensibly to protect national security and economic interests, and China's strong objections to these measures.

China's Demands vs. Dutch Interests

China's Desired Outcomes:

Revocation of Orders: China seeks the complete annulment of the Dutch government's orders, not merely a suspension. They view the current suspension as temporary and fear the orders could be reinstated.
Reversal of Court Rulings: A key demand is the review and reversal of the Enterprise Chamber's ruling that removed Jan-Willem van den Wall as CEO and stripped Wingtech of its voting rights.
Acknowledgement of Mismanagement: China desires an admission from the Dutch government that the situation was mismanaged, potentially involving a perceived disrespect towards Chinese investors and China itself.
Reinstatement of Control: Ultimately, China wants full control over Nexperia BV, including the reinstatement of its preferred management and corporate structure.

The Netherlands' Stated Interests:

Retention of Nexperia in the Netherlands: The Dutch government and industry stakeholders emphasize the importance of keeping Nexperia's production capacity and operations within the Netherlands.
Addressing Illegal Activity: The primary concern cited by Dutch officials and industry sources is the alleged illegal activity of the former CEO, Jan-Willem van den Wall, in transferring financial resources and production capacities away from Nexperia Netherlands back to China.
Supply Chain Disruption Prevention: The Dutch economic caretaker minister, Vincent Carammans, invoked a Cold War-era law (the Goods Availability Act) to prevent what he deemed a potential disruption to the global supply chain, which he believed would occur if Nexperia Netherlands collapsed.
Focus on Legacy Chips: Interestingly, some Dutch industry sources expressed confusion regarding the emphasis on intellectual property (IP) and technology by the Dutch minister, as they considered Nexperia's products to be "legacy chips" that China could largely replicate.

The Gap:

The fundamental gap lies in the differing perspectives on control and ownership. China views its acquisition of Nexperia as granting it full rights to manage the company as it sees fit. The Netherlands, however, prioritizes national interests and supply chain stability, leading to intervention. China's desire for a complete reversal of court decisions and an apology clashes with the Dutch government's stance on protecting its economic and security interests.

Legal Avenues and Potential Outcomes

The Dutch Legal System:

Enterprise Chamber's Decision: The Enterprise Chamber's ruling is considered a final decision within the Dutch legal system, meaning there is no direct appeal for a retrial.
Dutch Supreme Court Review: Wingtech can petition the Dutch Supreme Court, but this review is limited to the procedure by which the Enterprise Chamber reached its conclusion. The Supreme Court will not re-examine evidence or call witnesses.
Cassation: The Supreme Court can issue a "cassation" if it finds a serious procedural error or a misinterpretation of the law. This would result in the case being sent back to the Enterprise Chamber for reconsideration, not a new trial.
Timeframe: Such legal processes can be lengthy, as evidenced by a similar case where a Supreme Court decision took two years after the initial Enterprise Chamber ruling.

Likely Scenario: A Divided Nexperia:

The most probable outcome, as discussed, is the de facto division of Nexperia into two entities:

Nexperia BV (Netherlands-headquartered): Managing European fabs and potentially Asian packaging facilities.
Nexperia China: With main operations, sales offices, and the Dongguan factory.

This scenario, while potentially functional, is not the desired "endgame" for Wingtech, which aims for a smoothly operating, unified global supply chain.

The Chinese Perspective and Wingtech's Reliance

Wingtech's Investment and Expectations:

Wingtech invested a significant $4 billion USD to acquire 100% ownership of Nexperia, expecting full control and the ability to integrate its operations. The company has heavily bet on Nexperia, with the semiconductor business contributing 97% of its third-quarter revenue after divesting most of its consumer electronics business.

Desire for a Unified Company:

Despite the current rift, Wingtech desires Nexperia to continue operating as a single, cohesive entity with a smoothly functioning global supply chain. The current situation, characterized by arguments and potential decoupling, is detrimental to this goal.

Challenges for Wingtech:

Rebuilding Trust: The deep rift between the Dutch and Chinese sides necessitates rebuilding trust and reconstructing the global supply chain, a process expected to take considerable time.
Unlikely Reinstatement of Full Control: The scenario of Chinese management unilaterally taking over Nexperia's Dutch operations and replacing staff is considered highly unlikely.

The Geopolitical Undercurrent: US-China Tech Rivalry and Europe's Position

US Influence:

The US plays a significant, albeit often indirect, role in the crisis. Analysts suggest that Wingtech's placement on a US sanction list may have influenced Jan-Willem van den Wall's actions, and the Dutch government's decision to enact the Goods Availability Act occurred shortly after the US announced its 50% subsidiary rule. The US's pressure and influence are seen as a core factor in the unfolding events.

Europe's Weakened Position:

The Nexperia saga highlights Europe's perceived powerlessness when caught between the US and China's technological rivalry. The Dutch minister himself acknowledged the situation as a "wake-up call" for Europe.

Lack of Agency: Europe's inability to significantly influence the outcome of the dispute, despite being the location of Nexperia's European operations, underscores its limited agency in this geopolitical struggle.
Dependence on US: Europe's defense reliance on the US makes it difficult to openly criticize or diverge from US policy, even when it impacts European interests.
Internal Divisions: The 27-member states of the EU often have differing priorities, making it challenging to forge a unified stance on issues like trade and foreign investment. For instance, France advocates for tariffs and free trade's demise, while Germany remains reliant on global markets.

Shifting European Mentality:

Prioritizing Resilience over Cost: The crisis is forcing European businesses and policymakers to re-evaluate the prioritization of cost and efficiency over supply chain resilience.
Demand for Autonomy: There is a growing emphasis on "autonomy," both from the US and China, though criticizing China is often politically easier for European politicians due to defense dependencies.
Increased Scrutiny of Foreign Investment: The crisis is likely to lead to more stringent screening processes for foreign direct investment in critical infrastructure and industries across Europe, especially for Chinese-owned assets acquired legally before such measures were in place.

The Dongguan Factory: A Symbol of Globalized Production

Significance:

The Dongguan factory is crucial, accounting for 70% of Nexperia's global output and supplying chips to automakers worldwide. Its continuous operation for 25 years, even during the COVID-19 pandemic, highlights its importance.

Worker Sentiment:

Initially concerned about job security due to geopolitical tensions, workers have become more resolute, believing the Chinese government will resolve the situation. However, production disruptions have been observed, with machines idled for weeks.

China's Efforts to Maintain Stability:

Nexperia China is actively working to assure employees and clients of stable supply, even without wafers from Nexperia BV. This is partly due to Beijing's export controls, which are slowly being resumed.

The "Design in Europe, Assemble in China" Model:

The Dongguan factory exemplifies the common "design and develop in Europe/elsewhere, assemble and test in China" model. While cost-effective, this model has proven vulnerable to geopolitical disruptions, prompting a reevaluation of supply chain strategies.

Implications for the Chip Industry and Global Trade

Automotive Chip Production:

Legacy Chip Capability: China possesses the capability to produce automotive chips (typically 28nm and above), which are less complex than advanced smartphone chips.
Wafer Supply Challenges: While China has wafer manufacturers, validating new wafer supplies for automotive clients can take 6-12 months, posing a significant hurdle.
Wingtech's Sister Company: Wingtech has a sister company in Shanghai operating a 12-inch wafer factory, capable of performing similar functions to Nexperia's EU operations. This raises questions about the economic rationale of geographically dispersed production.

The Cost of Resilience:

Relocating or diversifying supply chains to enhance resilience will inevitably lead to higher costs and slower time-to-market for chipmakers. This presents a fundamental trade-off between security and efficiency.

Impact on Chinese Investment Abroad:

The Nexperia saga is impacting the risk perception of Chinese companies investing abroad. Shareholders are increasingly questioning the safety of their assets and the stability of operations in foreign markets, particularly in Europe. This could lead to a more cautious approach to overseas investments.

Conclusion: Mistrust and Fragmentation

The Nexperia crisis, while potentially resolvable in terms of its immediate operational impact, leaves a lasting legacy of mistrust and fragmentation in the global chip supply chain. The events have underscored the deep-seated geopolitical rivalries that now permeate international business, forcing companies and governments to navigate a landscape where political considerations often outweigh purely economic ones. The future of global trade and investment will likely be shaped by this ongoing tension, with a greater emphasis on national security, supply chain resilience, and strategic autonomy.