Fired by China’s designs on Taiwan, Western governments are now legislating heavily to reshore and control the end-to-end manufacture of advanced semiconductors. But what is the legalisation and how is it promising to secure the SOC (system on chip) supply chain? What will OEMs need to do in the future to guarantee access to advanced microchips?
Chips with everything
Semiconductors span everything from transistors to advanced microprocessors. They are revolutionising industries like automotive, healthcare, and defence through leaps in miniaturization, performance, and energy efficiency.
But microchips are hard to make
Designing and fabricating advanced semiconductors requires sophisticated software, precision technology, and specialised knowledge. Procuring raw materials like silicon and rare metals is challenging due to geopolitical and environmental factors. The industry's rapid evolution necessitates continuous research and development, and talent acquisition is competitive. The complex fabrication process, conducted in cleanroom environments, demands precise control over conditions, with any deviation potentially causing defects that cost millions of dollars.
Semiconductors as geopolitical footballs
Over the years semiconductors have become drivers of both hard and soft power in various geopolitical struggles.
Chips have become so essential to every aspect of our lives that losing access to them can cause economies to shrink and threaten national security. Just think about how the Covid-inspired chip shortage caused chaos in the car industry or China’s domination of the 5G market sparked international panic about the dangers of spyware.
Taiwan is the key
In the last 20 years, the security of the semiconductor supply chain of the Western world has become reliant on one small island. The island of Taiwan in the Western Pacific Ocean, just 100 miles off the coast of China is the world’s single most important producer of microchips;
Taiwan now accounts for the largest share of fabrication by far—producing 60 percent of the world’s chips and more than 90 percent of its leading-edge logic chips”
Source: Brookings Institute
China’s stance towards Taiwan and the possibility of their taking control of the majority of the world’s semiconductor foundries threatens to shift geopolitical and military power Eastwards to Beijing. And the Western democracies and their allies fear this could have a serious impact on their future prosperity, global influence and security.
But the US’s and European domestic production capabilities are negligible compared to the scale of demand:
The United States and EU currently account for approximately 12 per cent of global semiconductor manufacturing capacity, while their combined semiconductor consumption is approximately 33 per cent of the global total.
Source: CSIS
The lure of globalisation is wearing thin
The West seems to have woken up suddenly to the threat to semiconductor production and access. Or rather, they have finally grasped the nettle and decided to act. In the days of care-free globalisation, the focus was on levering international networks to propel growth - while ignoring potentially awkward and limiting dependencies.
In light of recent events, though, the major Western powers are looking to reshape complex supply chains to ensure the flow of innovative design and hardware. And they are taking an aggressive stance with legislation to correct this.
So, what are the new measures being taken and enshrined in law in Europe and America?
CHIPS for America Act (USA)
- Provides approximately $280 billion in new funding for domestic research and manufacturing of semiconductors.
- Establishes a federal assistance program for research, development, and demonstration of advanced nuclear reactors.
- Offers a 25% advanced manufacturing investment tax credit for investments in semiconductor manufacturing and processing equipment.
- Prohibits funding recipients from expanding semiconductor manufacturing in China and countries defined by US law as posing a national security risk.
European Chips Act (EU)
- The newly approved legislative package promises a €43 billion package of public and private investments to secure supply chains, prevent future semiconductor shortages, and promote investment into the industry.
- Aims to build large-scale capacity and innovation in the semiconductor sector.
- Encourages semiconductor production within the European Union.
- Calls for a multipronged approach that includes easing access to capital financing by qualified companies and pooling resources from the European Union, national governments, and private entities.
UK's National Semiconductor Strategy
- Commits up to £1 billion of government investment over the next decade to boost the UK's strengths and skills in semiconductor design, research, and advanced chip leadership.
- Sets out three key objectives: growing the domestic sector, mitigating the risk of supply chain disruptions, and protecting the UK's national security.
- Focuses on the UK's particular areas of strategic advantage in the semiconductors sector, including semiconductor design and cutting-edge research.
- Aims to secure the UK's advantage in future technologies such as AI, high-performance computing, and quantum technologies.
Will the US intervention work?
The US Hawkish attitude is in full swing, sanctioning firms and governments exporting semiconductors (as well as required materials and equipment for their production) to China. But the heavyweight financial and sanctions package is an almost unprecedented act of protectionism that is a big gamble for the US. According to the Carnegie Institute, there are fears the Act may cause more disruption to supply chains than it solves.
What about in the UK and EU?
Meanwhile, the EU and UK often seem to punching above their weight when it comes to semiconductor design and some elements of their manufacture. For example, the Dutch firm ASML.
is the only company in the world that makes extreme ultraviolet lithography (EUV) machines – the most sophisticated type of lithography equipment that is required to make every single advanced processor chip used in the world today.”
But ASML, while supporting the European Chip Act are still concerned it will turn government's attentions' inwards, risking the global partnerships that will drive progress. In fact, as ASML said in their positioning paper.
"Building a European-only, self-sufficient semiconductor value chain would be virtually impossible, given the extensive and complex global ecosystem that the industry has built over the last 40 years"
They argue the act will only be a success if it works to:
"To secure Europe’s relevance in the global semiconductor industry, which is and will continue to be based on a collaborative ecosystem of ‘mutual dependencies’."
In the UK, the so-called Silcon Fen around Cambridge has been underwhelmed in their response to the UK’s measures, as reported in The Guardian:
The Cambridge-based startup, Paragraf, which claims to be the only company in the world capable of manufacturing graphene to mass-produce semiconductors, said the taxpayer commitment would not cover a basic chip plant. Its founder and chief executive, Simon Thomas, said the content of the strategy revealed so far was “frankly flaccid”.
The fear is that underinvestment and protectionism by Western governments may prevent access to advanced microchips and slow down progress in R&D, in spite of all their efforts to ensure otherwise.
What should OEMs do?
Around the world, OEMs are planning to restructure and reassess their supply chains to ensure their continued access to advanced chip technology. But they are projecting into an uncertain future to plot their ability to meet demand. And it will be hard to do this alone.
As these big trends play out, OEMs should be looking to shore up their supplier partnerships and lever their expert knowledge to ensure they can continue to grow whatever the political weather.
6 ways to stay navigate semiconductor uncertainty
1. Long-term Contracts: Consider long-term contracts with suppliers to secure a steady supply of semiconductors
2. Inventory Management: Maintain a strategic inventory to buffer against supply chain disruptions.
3. Forecasting and Communication: Improve demand forecasting and communicate your needs clearly to your suppliers. This can help them plan their production better and ensure a more reliable supply.
4. Access Technology: Use advanced supply chain management technologies to gain real-time visibility into your supply chain and respond quickly to disruptions.
5. Collaboration: Collaborate closely with suppliers, EMS providers and other partners to ensure alignment and responsiveness to changes in demand or supply.
6. Geopolitical Awareness: Stay informed about geopolitical issues that could impact your supply chain and plan for contingencies.
