Got Chips?
Microchips are everywhere. In 2021, semiconductor unit sales reached a record 1.15 trillion-unit shipments. By delivering new functionalities, better performance and lower cost with each generation, advances in chips have spawned new products and transformed industries.
Photo Source: CNBC
Geopolitical tensions have significantly contributed to recent disruptions in the semiconductor supply chain. As protectionist policies increase and major world powers such as the US and China face mounting tensions, many countries are reevaluating their dependence on foreign suppliers of critical technologies. This has resulted in numerous government policies incentivizing the local production of semiconductors, creating new challenges for global supply chains.
The situation in Taiwan is particularly concerning since it produces 60% of the world’s semiconductors and over 90% of the most advanced chips.1 As China becomes more involved, companies with ties to these manufacturers have begun seeking or creating alternative solutions to mitigate potential risks if tensions further escalate. This heightened geopolitical environment further pushes globalization into decline as countries aim to safeguard their technological future from potential disruptions.
Taiwan Semiconductor Corp (TSMC) is investing $40BN in a fabrication plant to produce sophisticated chips in Arizona. This is a clear example of reverse globalization. Companies increasingly want vital inputs to be secure and closer to home. At a ceremony marking TSMC’s investment in Arizona in December, TSMC founder Morris Chang lamented that, “Globalization is almost dead and free trade is almost dead.” Recent trends support that. America is better situated than any other country to continue thriving in such an environment.
Photo Source: Air Innovations
The production and design of chip manufacturers and fabrication tools cannot be adjusted overnight, making it challenging to adapt to changes in demand. These are intricate systems that cannot be replicated easily or quickly. The production of semiconductors requires clean rooms that are carefully crafted to control temperature, humidity, airflow, noise, vibration, dust, and light, given the size and complexity of the chips. The specific standards of these clean rooms make their production time-consuming.
Besides creating new facilities in domestic and logistically convenient areas, fabricating chips is complex and time-consuming. Supply can be tight, requiring engineers to redesign their work to accommodate what is currently in stock and available. This supply issue can mean sacrificing design quality on the back end to finish the product. As the demand for chips increases in various devices and technologies, companies can become backlogged in certain areas as they try to keep up with growth. For example, many new cars now have 1,400-3,000 chips in each vehicle.2
In conclusion, semiconductors play a vital role in our daily lives, and any disruption to their supply chain can have significant consequences. Geopolitical tensions have caused recent disruptions to the semiconductor supply chain, leading to countries seeking to build their semiconductor industries and incentivizing companies to set up locally. Despite these challenges, the importance of semiconductors will continue to grow in the coming years, and the companies and countries that can navigate the challenges of the semiconductor supply chain will be well-positioned for the future.
Andrew Cialek, CFP®
1 The Economist: https://www.economist.com/special-report/2023/03/06/taiwans-dominance-of-the-chip-industry-makes-it-more-important
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