The automotive industry in the EU is in crisis. Analysis

Europe's largest automaker, Volkswagen, announced last week that it would cease production of the Golf model due to a possible shortage of chips triggered by a dispute between the Netherlands and China. The extent to which European manufacturers depend on Chinese components and why this dependence is of critical importance right now is described in the Izvestia article.

The threat of semiconductor shortages

• On October 22, Volkswagen, which also owns the production of Skoda, Seat, Audi and Porshe, announced the possible transfer of employees to a shorter working day due to problems with the supply of chips: the available semiconductors will be enough to ensure production only for the first week of November. BMW and Mercedes-Benz have also warned that disruptions in the supply of chips could affect their suppliers, and German auto parts manufacturer Bosch said it was preparing to take unpaid leave from workers at its flagship plant in Salzgitter.

• Problems with the supply of chips arose after the Dutch government nationalized the head office of the Chinese semiconductor manufacturer Nexperia Semiconductor (formerly Philips factory) located in Dutch Nijmegen on September 30. The day before, the Dutch Prime Minister attended a summit of European countries participating in the Semicon coalition, which is developing a new chip law aimed at expanding production capacity.

Amsterdam resorted to the previously unused "Accessibility of Goods Act" of 1952 to gain control of the company and remove it from the American sanctions imposed against the parent company Wingtech Technology. The Dutch government also dismissed Nexperia CEO Zhang Xuezheng, who, according to the official version, was involved in the transfer of production from Europe to China. According to foreign media reports, the replacement of the management was one of the conditions for the United States to withdraw the company from sanctions. In response, the Chinese Ministry of Commerce banned the re-export of finished chips from the Nexperia China factory to Europe.

The crisis of production

• As a result of the nationalization, the Hollande office lost control of the assembly plant in Donggang, China, which handled about 70% of all orders. Nexperia's Dutch office has warned automakers that it cannot guarantee the quality of products coming from China. In the press, such statements were called suicidal, since there is a risk of completely losing the consumer. The car market accounts for more than 60% of the company's revenue.

• The automotive market is already facing supply disruptions. In a situation of uncertainty, the cost of semiconductors on the market jumped twice: by 8% and by 10%, and the delivery time increased to 99 weeks. Technically, these chips are not difficult to replace, but finding alternative suppliers will take time. The automotive industry will be the most affected, as any component replacement requires approval by the automaker.

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• Even after new suppliers are found, they are unlikely to be able to quickly increase production, despite the fact that Nexperia provided 49% of electronic components for the European automotive industry. The risk of supply chain disruptions could affect Japanese automakers Toyota, Nissan, Honda and Mitsubishi Electric. The company has already warned its Japanese customers that it cannot guarantee the supply of components.

• The automotive industry is experiencing a particularly acute crisis, as it has already been affected by falling demand for electric vehicles, US trade duties on goods from the European Union and restrictions on exports of rare earth metals from China. The European Automobile Manufacturers Association (ACEA) issued a statement expressing its concern about the Nexperia situation and warning of a possible production shutdown.

• Germany has taken over mediation in negotiations with the Netherlands, the United States and China on the semiconductor supply situation. Together with the automakers, the German government has decided to look for an alternative to Nexperia chips and create an independent chip industry in Europe. The issue was considered at the EU level, but in the final communique, the European Union stated that the EU could use any means to protect itself from "unfair trade practices."

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What triggered the crisis

• European industry was in a vulnerable position after the coronavirus pandemic, and European sanctions against Russia became the catalyst for the economic crisis. The abandonment of cheap oil and gas for more expensive energy sources has led to an increase in the cost of European goods and a decline in their competitiveness.

• Germany, which was an industrial country and the engine of the European economy due to its access to cheap Russian oil and gas, suffered the biggest blow. The backbone of German industry was the mechanical engineering and automotive industries, and it was they who, due to their energy intensity, were the first to feel the consequences of EU policy decisions over the past few years. Gas prices have increased by 77% since 2021, forcing automotive and chemical companies to reduce capacity.

• An additional blow was the promotion of the "green" agenda by Brussels. Car companies massively launched the production of electric vehicles, but in the end, European electric cars were inferior to Chinese ones both in terms of performance and price: in order to protect the EU internal market, duties had to be imposed on Chinese cars. But domestic demand for electric cars turned out to be low, and their production was heavily dependent on Chinese components.

• The EU has begun assessing the damage caused to the alliance by US sanctions, but the trade war between the US and China has further worsened the situation for manufacturers, as China has imposed restrictions on exports of rare earth metals and goods containing them. Since December 1, this measure has been tightened — a license will be required for each such purchase, which is issued by Chinese officials. Not only the automotive industry, but also the defense industry may be under attack.