Semiconductors and Supply Chains
- Muzaffar Haqqani
- Jul 31, 2022
- 3 min read
Updated: Aug 14, 2022
Semiconductors are conductive components in integrated circuits, which in turn are applied to various hardware, from vehicles to phones. They have long been recognised for their technological importance in leading innovation and economic growth, as seen in government acts such as the US Semiconductor Chip Protection Act of 1984, which protects integrated circuit designs for chips. They have also recently regained global attention, especially in relation to their role in supply chains. This has led to world powers placing a new emphasis on forming self-reliance in the production of the chips, and not just protection of intellectual property as seen in the 20th century. They play a fundamental part in many industries that drive economic growth in developed and developing economies alike, everywhere along the manufacturing timeline — from the exportation of rare earth metals to the construction of semiconductors for eventual use in hardware. They also possess political significance, for both their economic importance and their use in military devices such as missiles. Increased demand for this hardware also increases derived demand for semiconductors due to their use as a component in this hardware.
[Figure 1: The different countries involved in the supply chain of semiconductors]
With increased demand and COVID-19 disrupting the supply chains of semiconductors, Supply was initially diminished by COVID-19 lockdowns affecting factories’ abilities to maintain production levels. Now that global demand has recovered from the initial shock of COVID-19, production levels are inadequate, causing demand to outweigh supply and thus increasing price levels in a range of hardware. As shown in Figure 2, increased demand and decreased supply lead to significant price increases. This has led to cost-push inflation in developed economies such as the US and the UK.
[Figure 2: The effects of derived demand and a fall in supply on semiconductors]
[Figure 3: Euro area semiconductor imports]
[Figure 4: The increased prices in the Euro area relative to a shortage in imports of the chips]
[Figure 5: Relative geographic semiconductor demand]
Such shortages and their consequences have led to renewed efforts in the US to engage in domestic production of semiconductors, furthered by US-China tensions as a result of economic competition between the two superpowers. Fundamentally, this is centred on achieving the smallest transistor size to fit as many transistors as possible on a semiconductor chip, thus creating more powerful chips.
The US and China are especially vying for first-mover advantage through the use of extensive government subsidies. In fact, in July 2022, the US Senate passed a bill of $52 billion to boost domestic manufacturing capacity. This also aids in building an environment that attracts foreign investment from key semiconductor firms, such as Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co., along with domestic leaders such as Intel. The urgency of the act was stressed by US Senator John Cornyn, “If the US lost access to advanced semiconductors in the first year… the GDP loss would be three times larger than the estimated $240 billion of US GDP lost in 2021.” Simultaneously, China has developed a Five-Year Plan which includes subsidies of $1.4 trillion for technology development, of which semiconductors are a major element.
Additionally, they have enacted a 10-year corporate tax exemption for semiconductor firms. In the current economic environment with rising costs faced by semiconductor firms, government intervention is not only necessary for growth but also for survival. The US recognises that it must stem its competitors' growth, doing so by blocking semiconductor manufacturing exports and restricting sales of chips made using US manufacturing equipment, as well as blocking Chinese acquisitions of US chipmakers. This way, they aim to both grow their domestic dominance in the market and lessen the Chinese share of the market.
Overall, the extensive government policies directed toward growing semiconductor dominance highlight their ever-growing importance in our modern and future supply chains and their utilisation for aiding economic growth. Inevitably, obstacles to such policies are almost certain, especially due to the fact that, as chips become more advanced, the cost and expertise required in their manufacture rise. In fact, the high fixed and variable costs required to compete in the industry have served as barriers to entry, forming monopolists. Even though the monopolies have gained significant economies of scale, the time required to build up production capabilities could take years to decades. The greatest question remains whether states can grow domestic supply capabilities to meet domestic demand, especially in China's case with fewer friendly trade partners as compared to the US, and less import capabilities.
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