Microchips have become an essential ingredient of almost all big-ticket manufactured goods and industrial items. They are used heavily in products ranging from phones, fridges, and HVAC systems to vehicles and critical medical technologies such as MRI and ultrasound machines. The reserve bank of St Louis found that 25% of 226 manufacturing industries in the U.S. use semiconductors as a direct input, and these industries represent 39% (Of Dollar Value) of all manufacturing output. According to the reserve banks’ calculations, while chips typically account for a small percentage of total input costs, the scarcity of chips halts production because they have no substitutes making chip supply critically crucial to the economy. (It is important to note that it is not the case that we can redesign these products without semiconductors as they came into existence because of the accessibility of microchips.) Currently, 932 billion chips are manufactured worldwide, feeding a €440 billion industry, making them one of the most significant factors in global GDP. The typical person will interact with dozens, if not hundreds, of semiconductors daily. Despite the magnitude of the chip industry, most of the manufacturing is centralised in Taiwan and South Korea and, more poignantly, TSMC and Samsung, with the two companies’ combined accounting for 71% of the market share, TSMC making up 54% on its own. However, Dan Wang, a technology analyst at research firm Gavekal, said in a podcast with DBS bank that it “still understates how important it is because these are some of the most advanced chips out there”.
The Chip Shortage
The last three years have unfortunately heralded the perfect storm for a global microchip shortage. The primary cause has been covid, as lockdowns in the second quarter of 2020 spurred an exponential increase of remote work and remote learning which resulted in a massive increase in the demand for computers, tablets, network peripherals, and other consumer electronics spiking the demand for chips. This while the supply chain in South Asia was later smashed by the COVID-19 Delta variant. Taiwan’s pursuit of a zero covid policy, severely slowed production, and furthered bottlenecks in the supply chain of the chips. While according to JP Morgan, Malaysia which performs many “back-end” operations such as chip packaging and testing, further backed up the supply chain activity as Malaysia too engaged in a strong covid ‘lockdown’ response.
Other factors include:
- Russia – Ukraine:
Neon which is needed for lasers in chip manufacture, had a sixfold price increase between December 2021 and March 2022 due to the 2022 Russian invasion of Ukraine, which brought the Ukrainian production of Neon, which accounts for half of the global neon supply as a and
90% of the semiconductor-grade neon used in the United States. Semiconductor manufacturers have searched for alternative suppliers, such as noble-gas manufacturers in China, but any new supplier would take at least nine months to increase production. Further sanctions against threatens manufacturer access to 40% of the global supply of the metal palladium, used in certain chip components which Russia is responsible for.
- US-China trade war:
- In September 2020, the U.S. Department of Commerce imposed restrictions on China’s largest chip manufacturer, Semiconductor Manufacturing International Corporation (SMIC), which stopped them from selling to companies with American ties, reducing the chip supply for essentially all companies in the American sphere of influence.
- In 2020, GlobalFoundries, AMD’s semiconductor manufacturing arm before
its IPO, ceased operations at its only Chinese plant.
There have been several initiatives to ease the global shortage from both the private and public sector.
TSMC announced in early 2021 a plan to invest US$100 billion over the next three years to increase capacity at its plants, days after Intel announcement of a US$20 billion plan to expand its advanced chip-making capacity in the US.
- U.S. Congress passed the CHIPS Act in Summer of 2022. President Biden signed the bill into law. The act provides roughly 280 billion dollars in new funding to boost domestic research and manufacturing of semiconductors in the United States.
- On September 15, 2021, President of the European Commission Ursula von der Leyen announced that the European Union will use legislation to push for greater resilience and sovereignty in regional semiconductor supply chains.
- In December 2021, India outlined a plan to boost its chip manufacturing base.
Micro Chips in Geopolitics:
The semiconductor industry has, in hindsight, become an increasingly salient factor in the Cold War. In the early days of the conflict, the Pentagon was fixated on applying computing power to defence systems, which gave the U.S. a technical edge allowing them to approach the potential conflict with much softer gloves avoiding escalation. Today as militaries begin to experiment with increasingly autonomous systems, they’ll be even more reliant on advanced chips. This is clearly on the mind of top diplomats just last week, Biden announced further measures in restricting sales of computer chip technology to Chinese companies, primarily affecting sales of advanced chips necessary for cutting-edge technologies especially in the defence industry. Finally aforementioned concentration of micro chip manufacturing in Taiwan, is increasingly becoming a sore point for the West as China continues to posture in its aspirations to reincorporate Taiwan.
The chip shortage has been a significant driver for inflation across the economy as chips now essential in manufacturing a range products which in total account for 39% of U.S. manufacturing output (in $ value).
The effect the chip shortage on inflation has had has been most evident in our local context with exploding used car prices. Since the start of covid pandemic, due to the bottlenecks and general slowdown in manufacturing which was exacerbated by Auto-Manufacturers now having to compete with decreasing supply of semiconductors combined with their increased demand for chips as the industry moves in the direction of automation, resulted in a significant decrease in vehicle output and as such a decrease in the number of vehicles entering the second-hand market. Although there is hope that prices will drop as global vehicle output is expected to surpass pre pandemic levels by 2024.