Update on the worrying semiconductor crisis

The semiconductor industry is at the center of global geopolitical and economic problems. The Russian invasion of Ukraine obviously has strong impacts on a sector that is already under pressure. China, Taiwan and the United States also play a central role in the geopolitics of chips.

A market of hundreds of billions of dollars

The global semiconductor market was worth $442 billion in 2020 with potential growth expected for last year of around 9%.

Global demand depends on supply reduction and only a handful of companies have the know-how of semiconductors. The Taiwanese giant TSMC is the leader and produces more than 50% of the world’s semiconductors. The top five semiconductor producing countries are Taiwan, South Korea, Japan, China and the United States.

In Europe, the two main semiconductor producers are Germany’s Infineon and Franco-Italian STMicroelectronics. But Europe only occupies the sixth position with less than 10% of world production. This technological differential generates a huge European dependence on Asia.

A great technological race

The world’s semiconductor giants have embarked on a technological race to reduce the thickness of chips as much as possible, which allows, for the same surface area, to have more powerful circuits and emit less heat.

TSMC already owns more than 85% of the world’s production of sub-7 nanometer semiconductors. In addition, the Taiwanese company is already manufacturing chips whose thickness varies between 3nm and 4nm and is working on the implementation of semiconductors below 2nm.

At the same time, US Intel claims it will put its first 7nm chips into production by 2023, and Samsung may also produce 7nm semiconductors.

The semiconductor shortage and its impacts

The lack of semiconductors is explained on the one hand by the logistical problems caused by the pandemic. Hence the slowdown in the new production lines that heavy investment had made it possible to implement. This was followed by a drop in supply, following the drop in production.

On the other hand, the demand for digital tools has increased significantly to power the latest graphics cards, processors, and other consoles. The gradual deployment of 5G, the extension of teleworking and remote training have led to an increase in computer sales. The demand is also driven by Artificial Intelligence and the automotive sector. Finally, the Chinese economic recovery, whose semiconductors represented the largest import budget in 2020 ahead of oil, accentuated this global demand.

This scarcity is multisectoral and has a strong impact on the global economy, due to the centrality of digitization today. Shortages systematically cause delays in production. Highly dependent on semiconductors, the automotive sector is particularly affected. Thus, the drop in automobile production in 2021 is understood.

A sector also affected by inflation

In addition, inflation is becoming more widespread and has reached record levels not seen for several decades. Something that also affects the semiconductor industry. Scarcity naturally causes prices to rise. Added to this are the growing costs of the raw materials necessary for the production processes. Freight costs, given the health crisis, have also increased significantly, which has impacted the sale price of chips. Semiconductor manufacturers naturally pass this inflation on to their customers, with sales price increases of between 10% and 20%.

Chip geopolitics

China is the world’s largest consumer of semiconductors, so electronic chips represent the weak link in its foreign trade, causing significant corrections in its trade balance.

The technological lag risks aggravating the already very tense geopolitical situation between China and Taiwan. Chinese President Xi Jinping has never hidden his desire to annex the neighboring island to China, which, among other things, would allow it to increase its semiconductor production capacity to reach 40% of the world market. On the other hand, it would put an end to China’s technological lag with respect to Taiwan, of which TSMC is one of the industrial jewels.

To counteract the disastrous economic and political consequences of annexing Taiwan, the United States and Europe have made record investments of several hundred billion dollars in semiconductors. With the Tata company, India is also embarking on the semiconductor race and hopes to make its way in an almost bipolar oligopolistic market where the United States and China still compete.

The semiconductor industry at the center of European interests?

Europe’s dependence on Asia is worrying because only 8% of the world’s semiconductors are produced here. To date, no European industry produces semiconductors smaller than 22nm. This has led the European authorities to establish the European Chip Law plan, which foresees investments of 30,000 million euros by 2030. The ambition of this plan is to reach 20% of world production, something that remains to be seen if it is truly realistic.

War in Ukraine: impact on semiconductors?

Russia’s invasion of Ukraine threatens to increase the global chip shortage as Ukraine supplies almost all of the neon used in semiconductor manufacturing, about 90%.

As for Russia, it also has large reserves of palladium, a precious metal used in the manufacture of certain electronic components. However, Russia has so far supplied 35% of US needs.

Since the beginning of the war, international sanctions have been multiplied to bring Russia to its knees. Sanctions that are intended to stifle shipments to defense and other high-tech aerospace and maritime buyers, but not to block shipments of consumer electronics. Not producing consumer electronics and chips in large quantities, Russia is also heavily reliant on its imports of high-end semiconductors.

Intel has stated that by complying with all applicable export regulations and sanctions it intends to control its exports to Russia. And although it is studying compliance in terms of the law, the giant TSMC has taken action against third parties known to supply products to Russia. This involvement in sanctions is particularly damaging to Russia because TSMC no longer ships any of the semiconductors it uses in the design of its own components.

The situation, far from improving, has become more unpredictable with the war in Ukraine and the outlook for the supply of semiconductors, almost past the health crisis, remains unknown despite the unmet needs that continue to increase.