The Geo-Strategic Issues Stemming from the Semiconductor Shortage

Semiconductors are increasing in importance. Their application ranges from consumer (Computers, Phones etc) to national security (Weapons system). The current shortage of semiconductors poses serious geostrategic issues for states and blocs, United States, China and the European Union. Furthermore, caught in the crossfire of this technological cold war are manufacturing states, Taiwan and South Korea. This race will be won by the State that possesses the capacity to produce the finest process node in vast amounts.

Industry Leaders

Due to the high costs associated with producing semiconductors, the market is concentrated. Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea’s Samsung pave the way with both manufacturers capable of producing large volumes of semiconductors at the 7 nanometer process node. To put this into context, US company Intel operates at the 10 nanometer process node, failing and delaying its production at 7nm until 2023. To further compound the failure, it will be making use of TSMC’s technology to be able to produce semiconductors at a 7 nanometer process node. Similarly, China’s Semiconductor Manufacturing International Corporation (SMIC) lags further behind at 14 nanometer process nodes. 

The future roadmap for Samsung and TSMC is to develop semiconductors at 5nm and 3nm. Intel holds similar ambitions, however they are currently focused on producing 7nm semiconductors, and the production at finer levels is likely to face obstacles and delays. Although Samsung and TSMC lead the way, the most advanced semiconductor is produced by TSMC for Huawei, the Kirin 900. However, the US ban that prevents the shipping of semiconductors where American technology is utilised to the Chinese manufacturer, has limited delivery of the Kirin 900. 

Whilst Asia is at the centre of semiconductor manufacturing, producing 83% of global chips, US firms account for half of global billings. The nature of the industry has seen the rise of geostrategic issues.

Cause of Shortage

The ongoing pandemic, and the subsequent COVID breakouts in Taiwan compounded the shortage of semiconductors. King Yuan Electronics, test and package chips for TSMC expected a reduction in its June output and revenue by 35%. All the while, the demand for semiconductors has increased, with “total sales equaling 167% of Korea’s Jan-Sep current account surplus and 146% of Taiwans”. 

Secondly, the ongoing US-China Tech Cold War has placed extra load on non-Chinese manufacturers to meet the shortfall. Furthermore, the high cost of researching and manufacturing semiconductors means that it is difficult to establish new companies to produce semiconductors of the same quality. For example, UAE’s Globalfoundries stopped their development of 7nm semiconductors. 

Thirdly, there has been a lack of access to EUV lithography equipment, which is integral to the production of 7nm and finer semiconductors. Netherland’s ASML produces EUV equipment which can cost in excess of $140 million. Furthermore, there is no other producer of this equipment to drive the costs down.  However, as ASML makes use of US technology, the US has control over exports, specifically blocking exports to Chinese manufacturers. 

Mitigation

The US approach to mitigating the shortage is to produce semiconductors closer to home. For example, potentially introducing incentives and massive investments under the American Chips Act to support business production at home. Furthermore, there has been a push for collaboration between Intel, Samsung and TSMC, allowing for effective cost sharing and steady growth. The US has also managed to convince TSMC to invest up to $12 billion to build a 5nm manufacturing facility in Arizona. Similarly, Intel will be opening a fabrication plant in 2024 and creating 3,000 jobs. This would see a return to fabrication by Intel, with the previous operation closing in 2018. The steps taken above would consolidate the supply chain, whilst also ensuring TSMC maintains its market share in the US. 

China has recapitalised the National Integrated Circuit Industry Investment Fund, and other regional and local funds. They have funded in excess of 200 billion. However, they continue to lag behind the US by approximately 3-5 years. 

The European Union aims to claim 20% of the global market by 2030. This has been outlined in the European Chips Act and resulted in Alliances such as the European Alliance for Processors and Semiconductors. There is also likely to be collaboration between the US and EU in this area in a bid to rebalance the global supply chain. (Pittsburgh EU-US Trade and Technology Council Agenda September 2021). 

Geo-strategy

Taiwanese leadership has acknowledged the advantages of leading the semiconductor industry. It provides them with the so-called ‘silicon shield’, whereby they can leverage to ensure security from the US, whilst also pursuing growth with China. 

The importance of excelling in this area has resulted in protection measures as seen in the US defence bill, which included the provision for subsidising US chip manufacturing and research. This effort to ensure the production occurs at home can be seen behind the construction of TSMC plant in Arizona.

Furthermore, the direct product rule has been used to cut ties between Huawei and TSMC, crippling China’s supply of high quality chips. Media reports suggest that the US placed pressure on ASML in the Netherlands to cut supply of equipment to China’s SMIC. Consequently, China has pursued a policy of De-Americanisation of their technology supply chains, which increased their reliance on Taiwan and South Korea. 

Finally, the ongoing shortage and lack of access to the industry is likely to maintain TSMC’s control over the industry for the foreseeable future. Consequently, the costs are likely to remain high and unchallenged.

Conclusion

The protectionist approach in the coming years is likely to create semiconductors with a strong national identity, made possible through supply chains that align with national values and alliances. Along the way, there is likely to be political turmoil with the end being determined by the nation that is able to produce the finest process node at volume.

Disclaimer: All views are my own and not those of my employer