Chinese parents spend five times more on education than the global average, and I think that's around 17% of their household income is a portion to education. I mean, these figures are really staggering, and I love this story because it shows you at a cultural, economic, and social level how Chinese society is built and how people are rewarded, what the incentives are from an economic standpoint.
Welcome to China Decode. I'm Alice Han.
In today's episode of China Decode, we're discussing why Nexperia halted shipments to China amid payment and ownership disputes, how the Chinese Gaokao exam shapes access to top universities, jobs, and social mobility in China, and why Trump and Xi's trade truce remains murky. All right, let's get right into it. James, how are you?
Very good. We've had Halloween, so it's very dark outside. It's wet. We're heading into winter now. Alice, how are you feeling?
Definitely. I mean, in London you're starting to see the Christmas lights, so Christmas is definitely around the corner. But certainly there's a lot happening towards the end of this year. We're not quite yet in holiday mode. One of the top issues to my mind, I think, in the last few weeks has been this Nexperia issue, and I think it's somewhat confusing. So we'll try to break down the complexities of this story. So a fresh crisis is rippling through the global auto industry, and this time it's not car strikes, but actually chips, and chips mainly coming out of China. The Dutch chipmaker Nexperia has suspended wafer shipments to its Chinese factory after a payment dispute, escalating a geopolitical standoff that's already got automakers like Honda, Volkswagen, and Stellantis bracing for production slowdowns and capacity cuts. This drama started after the Dutch government seized control of Nexperia from its Chinese owner, Wingtech, citing national security concerns, a move that prompted China to then block exports from Nexperia's factories. Now, as factories on both sides of the world grind closer to a halt, the European and Chinese governments are scrambling for a diplomatic off-ramp and de-escalation. For car makers already scarred by years of semiconductor shortages and more recently rare earth shortages, this could be a painful déjà vu, especially since the affected chips aren't just the fancy AI ones, but the cheaper everyday components that make windows roll and airbags deploy. There's so many different characters in this plot. It seems quite convoluted, but to my mind, it seems that the Chinese are trying to extract some concessions from the Europeans, who are unhappy with the state of play and certainly with the way in which the Dutch government has come in and seized control of a company where China has ownership. What's your take on this? I'm curious to hear.
Well, thanks, Alice. Yes, I'm going to try and break it down to its simple constituent parts. But before I do that, I think it's as well to focus on the really big picture here, because what this, I think, is all about is how the US-China trade war and tech war, which we're all so familiar with, is now blowing back onto Europe. And that really is key. This is also important because China is one of Europe's biggest trade partners, and it's Europe's biggest source of imports. European countries import many of the industrial components that their own companies cannot do without. So that's why this spat between a Dutch semiconductor company and China is really key, because it shows what might happen more in the future if relations between Europe and China continue to deteriorate. It all started rather kind of left field. As you've mentioned, Alice, this is a little-known Dutch semiconductor maker, and it doesn't make high-tech chips. It makes mid-tier chips, the sort of thing that you would need in your car to make the airbag work, to make the windows go up and down. So we're not talking about the cutting edge of technology, but it really has blown up since about October. And I think this shows how Europe is being drawn more and more into the US-China tech wars. It's also really significant in a very practical way because it shows how the lack of these chips that are made by this Dutch company can severely affect European car makers. Many of those car makers, we'll come to this more in a minute, have been predicting potential halts in their ability to produce cars. So it's got a very practical side to it as well. But just as a recap, the first thing was that Nexperia, which is, as you said, a Dutch company, was bought by a Chinese company which is called Wingtech in 2019.
And then last year, the US government put Wingtech on the so-called entity list, which is a blacklist that restricts the Chinese company's access to US technology. Then in September this year, a new rule from the US meant that the subsidiaries of Wingtech would also be put on the blacklist, and that included Nexperia. So the Dutch government acted immediately and seized control over Nexperia, that's based in the Netherlands, and it did so by citing a law that came right out of the old Cold War. So an extraordinary situation followed. Nexperia in the Netherlands stopped supplying its former Chinese parent company with the wafers that it needs to make chips. And of course then Beijing retaliated. It blocked Nexperia from getting the products that are made in China. So in other words, Nexperia back in the Netherlands didn't have anything to sell. As I said, all of this was really important because suddenly the biggest car makers in Europe, Volkswagen, BMW, Mercedes-Benz, Stellantis, Fiat, Peugeot, and Volvo all started to signal that they were really worried that they wouldn't be able to get the chips that they need to maintain production of their cars. So that's basically the story as it is. Just on Saturday, this is the last little twist. Just on Saturday, China said it could consider some exemptions from the controls for Nexperia chip exports. So in other words, it could be that Nexperia in the Netherlands might be able to get supplies again from its Chinese parent company and might be able to start supplying European car makers, but we're not sure about that.
What I find so puzzling about this whole saga is the fact that you basically have the Dutch government, as you rightly say, James, citing these small Cold War national security concerns, basically ousting the Chinese CEO of Nexperia. And basically, according to the South China Morning Post, as I was reading this, the Dutch government feared that the Chinese owners of Nexperia wanted to basically move manufacturing out of the Netherlands into China, where around 70% of the packaging happens anyway. And this, I think, led Nexperia to be a bit of collateral damage in between the EU-China broader trade spat. But I think from the Chinese perspective, this has obviously motivated the desire for more export control so that you can have a more controlled way to respond to these threats that Europe or America may pose. I think it's not a coincidence that you have the rare earths export controls happen at the same time coming out of China as the export controls for Nexperia. So in a way, I think the trade spat between the EU and China over Nexperia and the trade spat between the US and China over a host of issues are somewhat related and probably incentivizing Beijing to take a more controlled stance on a lot of these technologies. But I mean, the story itself is fascinating because to my mind, pretty unprecedented that you have a European government intervening in a private company, let alone a Chinese company, to oust the CEO and effectively tell all the employees that they should halt business. And again, this saga was so fascinating. I was reading about how in Chinese-language social media, the Nexperia headquarters management basically sent multiple messages to the employees telling them not to listen to the Dutch government authorities. So I definitely think that this is a great representation of the fact that a lot of companies are going to be involved as collateral damage in ongoing trade and technology-related disputes. And it's not just a US-China story, it's also an EU-China story. I sense that we're going to get more stories like this because invariably we're seeing China get more and more access into the European market by buying a lot of players in the high-tech space. So I think for a lot of companies that are involved in trade or technology between those two regions, this is going to be an ongoing threat. What's your take on the auto implications as well, James? Because it seems to my mind, just like earlier in the year, a lot of these car companies, when you see their stocks plummet in response to this, are very much susceptible and at risk to these supply shortages in chips, even if they're cheap, as you say, medium-tier chips.
Yeah, I mean, this is just another classic example of the long arm of Chinese coercive policies. As you mentioned, Alice, China is able to effectively exert huge leverage over the United States by restricting rare earth exports to all kinds of American companies that need those rare earths. And in this case, China can keep these big car companies, wherever they may be, Japan, Europe, the US, kind of dangling on a string because China controls the supply of the chips that Nexperia in China makes. So really, China is showing yet again that it can affect a global and very important industry simply by restricting the supply of a crucial component. In this case, these mid-tier chips that were made by this previously Dutch company. I mean, it just shows how China has the whip hand over the global economy in so many different ways. And I feel this is not going to be the last thing we hear about this. There are other industries that China can move to control in this kind of coercive way as well.
Yeah. And if I'm sitting in Brussels or I'm a European government, I'm very worried about the trend because, you know, part of, I think, why the Dutch government was concerned was that they were concerned that the manufacturing would get fully moved from the Netherlands to China. Currently, they produce these chips, they're called foundation chips, billions of these foundation chips in Europe. They assemble and then test them in China, where there's a growing industry of assembly and testing, and then they re-export them to other markets, including customers in Europe. Around 70% of the chips made in the Netherlands are sent to China to be assembled and tested and then re-exported. So if all these chips basically cut out the Netherlands and fully produced and assembled and tested in China, that, I think, bodes ill for the Netherlands. But I think broadening out, this is an ongoing trend that I'm seeing for a lot of European countries, including key industrial countries like Germany, where, you know, they once had a degree of dominance in the supply chain, especially at the high-value end. China is getting even more competitive, cost competitive, and logistics competitive. I think that this is going to paint a very bleak picture for Europe unless it gets its act together. That's my sense and my hot take. But just very quickly, James, as somebody who lives in the UK but goes frequently to Europe and talks to people in the region, what's your sense of this ongoing trend?
Yeah, I mean, you're absolutely right, Alice. This is part of a much bigger story. Part of the problem is that China has a huge trade surplus with the EU. That was about $34 billion US last year. So the EU is very much dependent on many of these industrial inputs. But the other part of it is that China's ascent up the tech ladder to, I would say, global preeminence right now. I said this before on this podcast. I personally think that China has now overtaken the US in technology and it's left Europe far behind. This has meant that many of the big companies, whether they be in the Netherlands or in Germany or France or Spain or here in the UK, are feeling like China has moved ahead, and therefore more and more companies and more and more importers are dependent on Chinese products, and that makes it very difficult for the EU to retaliate against China because Chinese products are mopping up markets all over the world, and they're mopping up markets here in Europe as well. So I think that what we're experiencing here with this chip spat is basically the foothills of the tensions that we have coming down the track. We're going to get into a much more fractious relationship between the EU and China over technology, over China moving ahead, and over the huge Chinese trade surplus with Europe. And just to round out this discussion, the EU has confirmed that China is suspending the October export controls for the EU when it comes to these chips. So it seems that there may be exemptions for the Nexperia chip imports, and some of the big automakers in Europe, their stocks rose quite a bit on Monday in response. Okay, we'll be back with more after a quick break, so stay with us.
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Welcome back. Every June, China comes to a standstill for two days. Flights are rerouted, traffic is silenced, and millions of families hold their breath. It's Gaokao week, China's great entrance exam into universities, where more than 10 million students take the national college entrance exam that defines their futures. The Gaokao isn't just a test. It's a sorting system that decides who gets into China's top universities, and by extension, who gets the best jobs, the best housing, and even social status. A single point quite literally can change the course of a life. A new book that's just come out, "The Highest Exam: How the Gaokao Shapes China," digs into how this marathon exam became both a ladder of opportunity and a tool of state control in China. It reveals a system that's supposed to reward merit, but often mirrors and enhances inequality, where wealthy Chinese families buy homes in elite school districts or pay for private tutoring that poorer students just simply can't afford, despite government crackdowns. James, this is one of the topics that I find personally fascinating for a number of reasons. I have a couple of cousins in China who recently went through the Gaokao system. So I feel as though I've vicariously gotten to know how stressful this exam really is. And I don't think it can be understated how stressful this exam really is, because unlike in the US, for instance, where I went to college, your application has a sum of different criteria or different inputs, whether it's the SATs, your extracurricular activities, your school grades, you're treated as a holistic package. In China, quite literally, it all comes down to the score that you achieve at this Gaokao, this big entrance exam.
And China has a history of being an exam-oriented culture. If we look back to the imperial examination system, which, you know, purportedly was supposed to be meritocratic, it quite literally brought young scholars from around China, from the furthest, most remote places of China, to do an exam where they could get the chance to be a scholar-gentry in the imperial court, a mandarin in Beijing. The Gaokao is still, I think, part of that historical legacy. And the figures are honestly quite staggering. More than 10 million Chinese students take this exam every year. Last year, there was a record 13.4 million people registered to take it. And they're competing mainly for the top universities, the top 100 universities, of which there are only 500,000 spots. I was looking up some of the admissions ratios. Tsinghua is reportedly under 2%. And just for reference, Harvard, where I went to, I think last year was 3.5%. So it creates an environment that is deeply high-pressured, but at the same time, as this book alludes to, and rightly so, it enhances and amplifies the existing inequalities in Chinese society. And I think it was part of the reason why, much to the dismay and surprise of a lot of shareholders, the Chinese government cracked down in 2021 on private tutoring companies, the big private tutoring companies that were involved in cram schools, because part of the reason was they believed it was leading to these economic inequalities. But it was also increasing the economic burdens for parents. You know, the one statistic is also surprising to me that Chinese parents spend five times more on education than the global average. And I think that's around 17% of their household income is a portion to education. I mean, these figures are really staggering, and I love this story because it shows you at a cultural, economic, and social level how Chinese society is built and how people are rewarded, what the incentives are from an economic standpoint. But James, what was your experience of this when you were in China? Did you have any friends that went through this or friends' children?
