Chip Wars

A dry run for rare earth wars?

The mainstream press has more than one way to control what you know about the world. Sometimes they will tell you the facts of a situation, but neglect to mention crucially important implications arising from those facts.

We have just such a situation this week following on from the Dutch Government’s take-over of the Dutch headquarters of the Chinese computer chipmaker Nexperia earlier this month. (Nexperia had been a wholly-own subsidiary of the Chinese firm Wingtech.)

The Dutch Government imposed direct supervision over Nexperia’s global management, via the first-ever use of the Cold War-era Goods Availability Act, citing national security concerns. (The Dutch Government was reacting to serious prompting from “Daddy” Trump, who is wanting to restrict China’s access to high-level chip-making technology.)

The problem is that most of Nexperia’s chip manufacturing and final testing takes place in China. Because these Chinese facilities are separate legal entities, they have refused to cooperate with the new Dutch-appointed management team. This has now effectively halted the production of Nexperia chips.

Nexperia normally produces millions of the chip modules used in modern automobiles. In fact, they are the main or only chip supplier for many European and American auto companies, including Volkswagen and BMW. Though these companies have some chip module inventory on hand, a cessation of new chip deliveries would halt much of Europe and America’s auto production within a matter of weeks.

The European Automobile Manufacturers’ Association is warning: “Without these chips, European automotive suppliers cannot build the parts and components needed to supply vehicle manufacturers”.

Their warning is echoed by the American Alliance for Automotive Innovation: “If the shipment of automotive chips doesn’t resume–quickly–it’s going to disrupt auto production in the U.S. and many other countries and have a spillover effect in other industries”.

Here’s the rub for the Europeans and Americans: If China digs in its heels, their loss amounts to a few hundred dollars for each car’s worth of chips not sold. Europe and America’s car manufacturers stand to lose tens of thousands of dollars for every car they are unable to assemble. If push comes to shove, China has the power to shut down Western automakers indefinitely.

The Dutch Government’s Economy Minister Vincent Karremans defended his actions, saying: “Europe would have been 100 percent dependent for these sort of chips, in terms of knowledge, expertise and capacity, on foreign countries,” Too late, Mr. Karremans, what you fear has already happened.

Meetings are now scheduled between Karremans and his Chinese counterpart. Hopefully by this point, the Dutch politician has realized that China has the winning hand here, and he needs to fold. If not, it will be very damaging for Western economies.

One can wonder if the Chinese Government deliberately escalated this crisis as a message to Western politicians. The economic disruption caused by the cessation of automotive chip production is merely a small fraction of the economic chaos that would result if China were to halt all of its rare earth exports for an extended period.

Donald Trump wants to bully China into accepting a one-sided trade and tariff deal. China is letting Mr. Trump know that they, not he, hold the jokers in that game of poker.

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Update: Volkswagen has now shut down a Golf assembly line in Germany. More shutdowns are coming. The Europeans seem determined to destroy whatever remains of their industrial base.