Geopolitical tensions are increasing and we will all feel the consequences.
By: John Rapley / The Telegraph
Translation: Telegrafi.com
The diplomatic row caused by the Dutch government’s seizure of a chip manufacturing company called Nexperi, may seem like a dark business story, but in time its consequences will affect us all.
Nexperi produces what are called legacy chips – cheap semiconductors that are not at the cutting edge of technology, such as Artificial Intelligence [AI], but are needed in the production of a wide range of goods – from cars and mobile phones, to household appliances. They are ubiquitous in modern life, with the average car containing about 1,700 of them.
However, as global demand for consumer goods continues to grow, production of these chips has not kept pace. The profits are simply too small to justify further investment in developed countries, which prefer to focus on advanced versions with higher returns – such as those that transformed Nvidia-n in the richest company in the world.
As a result, companies that produce older chips have followed a common cycle in the industry: shifting production to lower-cost areas in the developing world. Nexperi managed to improve production efficiency by moving assembly and packaging to China, from where the chips are distributed worldwide.
In recent years, governments have become increasingly concerned about the security risks if the most advanced chips – those used in military technology and AI – fall into the wrong hands, and have begun taking measures to secure supply chains and control exports.
However, most countries have not done the same with old chips. Meanwhile, China has invested heavily in developing its industry, aware of the central role it plays in modern manufacturing.
This is where it comes in. Nexperi. Its history is worth repeating. The Dutch multinational Philips founded a semiconductor division in the 50s, which would later become Nexperi. Philips-decided to split it up after 2000, to focus on its core mission in medical technology. Then, in 2017, Nexperi was sold to a Chinese consortium and eventually bought by Wingtech-u, a Chinese company that was blacklisted by the US Department of Commerce last year.
At the end of September this year, the Dutch government claimed that it had reason to believe that Wingtechwas transferring sensitive technology to China. For this reason, she activated a Cold War-era emergency act to take control of the company – an action she herself described as “highly extraordinary.”
Undoubtedly, China did not take this well. Wingtech-ui denied the allegations and Chinese authorities blamed American pressure for the Dutch decision: “The Dutch Ministry of Economic Affairs is clearly following the American government – like a obedient lamb,” said an executive of Wingtechfor BloombergBeijing then suspended exports of high-performance chips. Nexperi-s, threatening to ban much of global production.
Both sides have spent the past month easing tensions — helped by a truce earlier this month in the US-China trade war — and this week by suspending the Dutch seizure of the company. The chips have started to move again. However, this is only a truce, and Europe remains vulnerable to further Chinese or American action.
There are two big stories here. The first, the well-known one, is that Europeans once again find themselves caught in the middle of a clash between China and the US and are trying not to become collateral damage. Beijing has a dispute with the Dutch government, but it is German carmakers – who need the chips of Nexperi-s – who will be among the first victims of a prolonged clash.
The European Union’s diplomatic and administrative structures, which are essentially confederal, are rooted in a liberal, rules-based order that is rapidly disappearing. The continent is trying to move forward in the dark, but its fragmented structures make it very difficult to negotiate with two countries led by authoritarian leaders who make decisions on their own.
The second, bigger story, however, is that this is part of a broader deglobalization of manufacturing and the reshaping of supply chains, driven by heightened geopolitical tensions between the US and China. The cost of this will ultimately fall on all of us. Bringing back local production of old chips would be expensive, requiring new investments with low returns, and would therefore likely rely on government subsidies. In fact, the American CHIPS Act of 2022 earmarked $10 billion for just that purpose.
But if, as a result, chips end up being more expensive and governments are forced to spend more on economic security, this will ultimately lead to higher prices for consumers and higher taxes. Until now, most people in Western countries have experienced the trade war as mere headlines – but, sooner or later, the clash over Nexperi-n and similar conflicts will be coming to a showroom near you. /Telegraph/