The ongoing computer chip shortage that began in 2021 is expected to worsen before improvements are seen. This assessment arises from a combination of preliminary studies and anecdotal evidence.
While the COVID-19 lockdowns initially sparked this shortage, the issue stems from decades of shortsighted decisions coupled with escalating geopolitical tensions. This situation is not merely about mending a few broken links in the supply chain; here’s why.
The world’s leading semiconductor manufacturers are Taiwan’s TSMC and South Korea’s Samsung Electronics, which together account for over 70 percent of global semiconductor production.
Meanwhile, the U.S., once a significant player in chip manufacturing, has fallen behind due to a series of poor strategic decisions over the past 15 years. However, this dynamic could shift if the U.S. government manages to adapt the semiconductor landscape to bolster local production.
The current global shortage, coupled with rising tensions with China, has prompted the U.S. administration to scrutinize its semiconductor supply chain. There’s a growing concern regarding the concentration of manufacturing in a few Asian firms, leading to calls for reshoring production back to American soil.
The U.S. is allocating billions of dollars toward this initiative and exploring strategic partnerships with other nations. However, the government’s historical record on economic intervention raises questions about the potential effectiveness of these efforts. Their typical methodology involves injecting large sums of money into issues but often lacks sustainable solutions.
To grasp the complexities surrounding semiconductor geopolitics, it is essential to understand the supply chain dynamics and prevailing business models. Companies like Intel are classified as integrated device manufacturers (IDMs), meaning they handle both the design and manufacturing of their chips.
Conversely, most U.S. semiconductor companies qualify as fabless; they design chips but outsource production to foundries. This outsourcing primarily directs manufacturing to TSMC in Taiwan and Samsung in South Korea.
Supply Chain Complexity
Over the last 15 years, U.S. and European firms have increasingly adopted this fabless model. TSMC and Samsung have capitalized on this shift, investing heavily in advanced manufacturing technologies. As a result, when a company like Apple needs the latest chip for their iPhone, they turn to TSMC.
According to Trendforce data, TSMC holds a 55 percent share of the foundry market, while Samsung commands 18 percent. Collectively, Taiwan and South Korea dominate a staggering 81 percent of global foundry production, making them essential partners in technological manufacturing.
In a recent summary, Bank of America noted the remarkable transformation in the industry:
“In 2001, there were 30 companies producing at the leading edge, but as semiconductor manufacturing has grown more complex and costly, that number has plummeted to just three.”
These three firms are TSMC, Samsung, and Intel. However, Intel has also lagged behind in manufacturing capabilities compared to TSMC and Samsung. Neil Campling, head of technology at Mirabaud Securities, explains this phenomenon:
“Taiwan and South Korea have become leaders in wafer fabrication through massive capital investments and supportive government policies, alongside access to skilled labor forces.”
Yet, the intricacies of the supply chain go even deeper.
Despite TSMC and Samsung’s dominance, they remain reliant on machinery and equipment sourced from the U.S., Europe, and Japan. Companies producing the essential tools for foundries are known as semiconductor capital equipment vendors, or “semicap” for short.
The top five semicap vendors control nearly 70 percent of the market, with three based in the U.S., one in Europe, and one in Japan. Among them, Netherlands-based ASML stands out as the only manufacturer capable of producing extreme ultraviolet (EUV) machines, which are crucial for creating advanced chips made by TSMC and Samsung.
The Great Computer Chip Shortage of 2021 is Just Heating Up
As part of U.S. policy, there’s an ongoing effort to forge alliances. In April, reports emerged of collaboration between the U.S. and Japan focused on securing supply chains for critical components like semiconductors. The goal is to prevent excessive concentration of production in regions like Taiwan.
Additionally, the U.S. is taking steps to curb China’s growing influence in semiconductor development. Despite China’s significant investments in its semiconductor sector, such as SMIC, its technology remains years behind competitors like TSMC and Samsung.
With various U.S. sanctions, efforts are underway to further limit China’s advancement in this field. Last year, Washington placed SMIC on an Entity List, restricting American companies from exporting specific technologies to them. Notably, up to 80 percent of SMIC’s equipment is sourced from U.S. vendors.
The U.S. government has also pressured the Netherlands to halt ASML’s machine sale to SMIC—essential for producing the most sophisticated chips. Despite these efforts, the machine has yet to be shipped to China. Without access to equipment from the U.S. or its allies, China faces significant barriers in producing cutting-edge chips.
China, however, may consider alternative routes. If economic means to acquire advanced chip technologies prove unfeasible, military options could appear increasingly attractive.
This week, Taiwan’s Ministry of National Defense presented an annual report to lawmakers, warning that China could potentially “paralyze” Taiwan’s defense systems through electronic warfare. As highlighted by ZeroHedge:
“With increasing probabilities of an invasion, China could attempt to seize Taiwan by force, especially in light of America’s tumultuous exit from Afghanistan, which has diminished U.S. credibility.”
A successful invasion would allow Communist China to gain effective control over TSMC.
Meanwhile, as reported by the Wall Street Journal, the shortage of computer chips may exacerbate due to a lack of essential ceramic components. Modern electronics, including smartphones, rely on thousands of tiny ceramic bits to manage electrical flow. Electric vehicles may contain more than 10,000 ceramic bits.
These components, known as multilayer ceramic capacitors (MLCCs), like semiconductors, are produced by only a handful of Asian firms. With ongoing COVID-related factory shutdowns, their production could be delayed.
For instance, Murata Manufacturing, which supplies 40 percent of the global MLCC market, temporarily shut down a factory in Fukui, Japan, for the last week of August due to a COVID outbreak. Similarly, Taiyo Yuden suspended portions of its operations in Malaysia following employee infections.
While the ceramic bit shortage may eventually resolve itself, it’s clear that the computer chip shortage of 2021 is far from over. This situation warrants close attention, given its substantial economic and geopolitical implications—and even presents potential investment opportunities.
Sincerely,
MN Gordon
for Economic Prism
Return from The Great Computer Chip Shortage of 2021 is Just Heating Up to Economic Prism
