ven as everyday life remains deeply impacted, policymakers are now also focused on second- and third-order effects wrought by the COVID pandemic, such as changing labor-markets, noxious health misinformation, and inflation. As of late, a new theme has begun to crowd leaders’ agendas: supply shortages, particularly of the semiconductors that are essential to electronics and modern life.
The consequence of chip shortages go beyond factory assembly floors: the current crisis has engendered an arms race among major countries, jockeying to ensure their economies and militaries can retain continued access to chips and other critical technologies.
This landscape is one where reliance on complex foreign supply links has battered an earlier complacency around the availability and accessibility of resources. Evaluating the dimensions of this struggle — and the efforts that states and leading technology firms are undertaking to confront this challenge — provides a novel frame on some of today’s most salient and emergent geopolitical trends.
The pandemic has made real the risks of complex supply chains
While the benefits of global trade are unquestionable, the past year has brought into stark relief that this connectivity is not without its risks. Pandemic-induced shortages must be added to an ever-growing motley of both climatic and man-made disasters: droughts in Taiwan, freezes in Texas, storms in Korea, an unprecedented grounding in the Suez overshadowing the strained capacity of vital southern California ports.
These examples do not feature one of the most worrying possibilities: a great-power military escalation in Asia.
These diverse and overlapping risks have awoken national leaders to supply chain risks and reliance on foreign suppliers and governments for critical goods. Advanced semiconductors sit at the very heart of this concern, given the global diffusion of their value chain, inherent technical complexity, and irreplaceable role in modern existence.
The concern is focal to the leading generation of processors, where the transistor density is measured in nanometers (nm). While certain segments of the overall supply chain — including underlying R&D or chip design — are more disparate or represent an area of strength for countries like the U.S. and its allies, only a small number of firms are able to produce these sub-10 nm chips en masse.
This advanced manufacturing capability — which requires profound and rare technical know-how, as well as billions in upfront costs — is currently concentrated in the politically-delicate geography of East Asia, with Taiwan Semiconductor Manufacturing Company (TSMC) and Korea-based Samsung as the globe’s leading producers. In 2021, TSMC and Samsung alone are forecasted to reap 100% of the 5nm semiconductor market. There are other pressure points in the supply chain, as well, such as the Netherlands’ ASML, the only firm capable of building a component tool essential for advanced chip production.
These industry dynamics make it essentially impossible to spool up new, excess capacity on demand — particularly when these systems are subject to exogenous shocks such as COVID-19. Many industries have been impacted during the pandemic, as digitization efforts that would have normally stretched out over years were compressed to months, with a step-up in demand for digital products — gaming consoles, TVs, computers — arriving at the same time that facilities were shuttered or slowed. Other verticals, such as auto, badly forecasted the economic fallout of the pandemic by canceling chip orders, with production remaining seriously hampered as a result. All of this highlights to governments the relative fragility of key supply chains.
Resourceful leaders have overcome supply shocks at times of great crisis. New cotton-producing markets in Egypt and India were cultivated during America’s civil war, when Confederate ports were blockaded. Scientific ingenuity led to the creation of synthetic rubber, right as the Allied war effort reeled with Imperial Japan’s conquest of Southeast Asia, the richest natural source of the material.
The semiconductor challenge today defies such relatively straightforward solutions. Computer chips are complex finished products, not commodities, such as cotton, rubber, or oil. While strategic commodities do continue to represent areas of concern, reliance on goods born from global value chains will remain a perennial obstacle. No one market — not the U.S., the European Union, or China — can count itself self-sufficient in many of the most critical products, such as semiconductors. States are awakening to this reality and taking whatever steps to confront the far-reaching challenge.
Industrial policy is back—with the state seen as complementary to innovation and resilience
Distinct from the hands-off, market-driven ethos of earlier years, regional and global powers now view industrial policy — using instruments of state to proactively foster conditions for economic potential — as a key element of governance. Government leaders are motivated to invest funds and champion visions that robust public sector investment in science and technology is once again key to growth, global prestige, and security.
This philosophy of state-directed capitalism has been a mainstay of many Asian nation’s post-war development strategies. Korean and Japanese “national champions,” buttressed by government subsidies and trade protections, served as the vanguard of economic revival and modernization. Beijing has also followed this mold since Deng Xiaoping’s market reforms, though with a far more authoritarian tint. In more recent years, the country’s Communist Party has issued agenda-setting policy statements outlining plans for the country to become the preeminent leader in a range of key domains, including semiconductor, by mid-century.
While industrial policy may be a long-favored tool in Asia, it fell from favor in the U.S. after the Cold War — until now. Representing a rare area of consensus, leaders from both parties in Washington believe that a largely hands-off approach no longer serves the country’s interests. The clearest evidence of this was the 68-32 Senate vote passing the Innovation and Competition Act, which, at its core, sets aside $52 billion for semiconductors. The view is echoed by the White House where, following a 100 day review, President Joe Biden announced a series of policies focused on strengthening the country’s industrial base and its reliance on foreign supply chains.
The U.S. government’s recent focus has borne some promise, with Samsung and TSMC each announcing plans to build new facilities inside the country’s borders; U.S.-based Intel and GlobalFoundries have also shared ambitious expansions. These are longer-term solutions, however, as it will take several years before any chips roll off assembly lines. Even as industry continues to advocate for federal intervention, shortages are expected to continue through 2023.
Semiconductor innovation and production remains a top priority beyond the U.S. The EU has advanced an extremely aggressive goal of producing a fifth of the global output of semiconductors by 2030, plowing $150 billion into the effort. European Commission Executive Vice-President Margrethe Vestager bluntly stated the bloc needs “to become less dependent on others when it comes to key technologies.” Japan has shared its own plan, as well (Germany and Japan are both vying to host new TSMC plants). A global arms race is underway to foster innovation and reduce foreign reliance on key supply chains.
Tech firms—already enmeshed in policy challenges—are deeply exposed to chip risk
But governments are not the only actors closely engaged in this challenge: tech colossuses such as Apple, Microsoft, and Google would be ruinously impacted by serious disruptions to the semiconductor value chain. Even as many countries seek to broadly rein in the influence of these firms, they are an outsized stakeholder in navigating the semiconductor crisis.
Some of the most consequential risks are plainly visible: new products rely on faster, more efficient processors, memory, sensors, and other electronics. Were production imperiled, this growth would ground to a halt; no new Apple Watches, Microsoft Surface laptops, or Google Pixel phones. The risk now merits candid disclosure to investors, with Apple warning of “supply constraints” during its most recent earnings call.
Beyond devices sold to consumers and enterprises, less visible, down-stream applications would also be impacted. Many of the largest firms use case-specific processors designed to optimize key processes, such as supercharging cloud service, deploying power-sipping edge compute, or enabling supercomputer-level research. As a short sample, custom-built chips are leveraged by Alphabet’s YouTube (for video transcoding), Facebook (for augmented reality), and AWS (for network switches, among others). In the past, many of these firms have relied on vendors such as Intel and AMD for high-performance chips but have recently found custom-built options to better suit their needs.
While these firms have the talent and capital to engage in chip research and design, they remain reliant on a finite number of suppliers to sustain other facets of a complex supply chain, such as manufacturing, outsourced semiconductor assembly and test (OSAT), other ancillary components of the process. Even the largest tech firms do not own their own chip fabs (Apple relies on TSMC for the chips that power its latest-generation of iPhones and M1 Macs). Furthermore, as these companies continue to specialize their own brand of silicon, the feasibility of swapping these devices out with off-the-shelf components — as could be necessary during a serious crisis — becomes less practical. While other sophisticated users of semiconductor technology — such as aerospace, industrial systems, and auto — will also be severely impacted, these firms represent global bellwethers to financial markets and in the public’s consciousness.
An assemblage of teetering blue-chip giants would have significant knock-on effects across the economy and society. While they compete on other fronts, they are natural collaborators on this issue. They will seek to leverage their considerable capital — political and financial — to increase capacity, promote resilience, and temper geopolitical risk.
The incentives for partnership between leading companies and governments are also clear. Even as legislators wrestle with issues of corporate concentration, Washington enlists these firms to power the nation’s most sensitive cloud systems, tackle health misinformation, and counter cyber threats. Public-private partnership will be as deep in addressing the semiconductor crisis as in any of these domains, as it continues to become clear this is not solely a major strategic business risk, but one with deep security and geopolitical dimensions. The scale and complexity of the semiconductor crisis — and the budget-breaking sums needed to move the needle — ensure that it will be the most pressing example of supply chain fragility through this decade.
a global affairs media network
When the Balance of Power is Measured in Nanometers
Photo via Christian Chen via Unsplash.
August 17, 2021
The ongoing semiconductors supply crisis underscores how today’s geopolitics are shaped by vulnerable supply chains, the return of industrial policy, and global tech titans, writes Lulio Vargas-Cohen.
E
ven as everyday life remains deeply impacted, policymakers are now also focused on second- and third-order effects wrought by the COVID pandemic, such as changing labor-markets, noxious health misinformation, and inflation. As of late, a new theme has begun to crowd leaders’ agendas: supply shortages, particularly of the semiconductors that are essential to electronics and modern life.
The consequence of chip shortages go beyond factory assembly floors: the current crisis has engendered an arms race among major countries, jockeying to ensure their economies and militaries can retain continued access to chips and other critical technologies.
This landscape is one where reliance on complex foreign supply links has battered an earlier complacency around the availability and accessibility of resources. Evaluating the dimensions of this struggle — and the efforts that states and leading technology firms are undertaking to confront this challenge — provides a novel frame on some of today’s most salient and emergent geopolitical trends.
The pandemic has made real the risks of complex supply chains
While the benefits of global trade are unquestionable, the past year has brought into stark relief that this connectivity is not without its risks. Pandemic-induced shortages must be added to an ever-growing motley of both climatic and man-made disasters: droughts in Taiwan, freezes in Texas, storms in Korea, an unprecedented grounding in the Suez overshadowing the strained capacity of vital southern California ports.
These examples do not feature one of the most worrying possibilities: a great-power military escalation in Asia.
These diverse and overlapping risks have awoken national leaders to supply chain risks and reliance on foreign suppliers and governments for critical goods. Advanced semiconductors sit at the very heart of this concern, given the global diffusion of their value chain, inherent technical complexity, and irreplaceable role in modern existence.
The concern is focal to the leading generation of processors, where the transistor density is measured in nanometers (nm). While certain segments of the overall supply chain — including underlying R&D or chip design — are more disparate or represent an area of strength for countries like the U.S. and its allies, only a small number of firms are able to produce these sub-10 nm chips en masse.
This advanced manufacturing capability — which requires profound and rare technical know-how, as well as billions in upfront costs — is currently concentrated in the politically-delicate geography of East Asia, with Taiwan Semiconductor Manufacturing Company (TSMC) and Korea-based Samsung as the globe’s leading producers. In 2021, TSMC and Samsung alone are forecasted to reap 100% of the 5nm semiconductor market. There are other pressure points in the supply chain, as well, such as the Netherlands’ ASML, the only firm capable of building a component tool essential for advanced chip production.
These industry dynamics make it essentially impossible to spool up new, excess capacity on demand — particularly when these systems are subject to exogenous shocks such as COVID-19. Many industries have been impacted during the pandemic, as digitization efforts that would have normally stretched out over years were compressed to months, with a step-up in demand for digital products — gaming consoles, TVs, computers — arriving at the same time that facilities were shuttered or slowed. Other verticals, such as auto, badly forecasted the economic fallout of the pandemic by canceling chip orders, with production remaining seriously hampered as a result. All of this highlights to governments the relative fragility of key supply chains.
Resourceful leaders have overcome supply shocks at times of great crisis. New cotton-producing markets in Egypt and India were cultivated during America’s civil war, when Confederate ports were blockaded. Scientific ingenuity led to the creation of synthetic rubber, right as the Allied war effort reeled with Imperial Japan’s conquest of Southeast Asia, the richest natural source of the material.
The semiconductor challenge today defies such relatively straightforward solutions. Computer chips are complex finished products, not commodities, such as cotton, rubber, or oil. While strategic commodities do continue to represent areas of concern, reliance on goods born from global value chains will remain a perennial obstacle. No one market — not the U.S., the European Union, or China — can count itself self-sufficient in many of the most critical products, such as semiconductors. States are awakening to this reality and taking whatever steps to confront the far-reaching challenge.
Industrial policy is back—with the state seen as complementary to innovation and resilience
Distinct from the hands-off, market-driven ethos of earlier years, regional and global powers now view industrial policy — using instruments of state to proactively foster conditions for economic potential — as a key element of governance. Government leaders are motivated to invest funds and champion visions that robust public sector investment in science and technology is once again key to growth, global prestige, and security.
This philosophy of state-directed capitalism has been a mainstay of many Asian nation’s post-war development strategies. Korean and Japanese “national champions,” buttressed by government subsidies and trade protections, served as the vanguard of economic revival and modernization. Beijing has also followed this mold since Deng Xiaoping’s market reforms, though with a far more authoritarian tint. In more recent years, the country’s Communist Party has issued agenda-setting policy statements outlining plans for the country to become the preeminent leader in a range of key domains, including semiconductor, by mid-century.
While industrial policy may be a long-favored tool in Asia, it fell from favor in the U.S. after the Cold War — until now. Representing a rare area of consensus, leaders from both parties in Washington believe that a largely hands-off approach no longer serves the country’s interests. The clearest evidence of this was the 68-32 Senate vote passing the Innovation and Competition Act, which, at its core, sets aside $52 billion for semiconductors. The view is echoed by the White House where, following a 100 day review, President Joe Biden announced a series of policies focused on strengthening the country’s industrial base and its reliance on foreign supply chains.
The U.S. government’s recent focus has borne some promise, with Samsung and TSMC each announcing plans to build new facilities inside the country’s borders; U.S.-based Intel and GlobalFoundries have also shared ambitious expansions. These are longer-term solutions, however, as it will take several years before any chips roll off assembly lines. Even as industry continues to advocate for federal intervention, shortages are expected to continue through 2023.
Semiconductor innovation and production remains a top priority beyond the U.S. The EU has advanced an extremely aggressive goal of producing a fifth of the global output of semiconductors by 2030, plowing $150 billion into the effort. European Commission Executive Vice-President Margrethe Vestager bluntly stated the bloc needs “to become less dependent on others when it comes to key technologies.” Japan has shared its own plan, as well (Germany and Japan are both vying to host new TSMC plants). A global arms race is underway to foster innovation and reduce foreign reliance on key supply chains.
Tech firms—already enmeshed in policy challenges—are deeply exposed to chip risk
But governments are not the only actors closely engaged in this challenge: tech colossuses such as Apple, Microsoft, and Google would be ruinously impacted by serious disruptions to the semiconductor value chain. Even as many countries seek to broadly rein in the influence of these firms, they are an outsized stakeholder in navigating the semiconductor crisis.
Some of the most consequential risks are plainly visible: new products rely on faster, more efficient processors, memory, sensors, and other electronics. Were production imperiled, this growth would ground to a halt; no new Apple Watches, Microsoft Surface laptops, or Google Pixel phones. The risk now merits candid disclosure to investors, with Apple warning of “supply constraints” during its most recent earnings call.
Beyond devices sold to consumers and enterprises, less visible, down-stream applications would also be impacted. Many of the largest firms use case-specific processors designed to optimize key processes, such as supercharging cloud service, deploying power-sipping edge compute, or enabling supercomputer-level research. As a short sample, custom-built chips are leveraged by Alphabet’s YouTube (for video transcoding), Facebook (for augmented reality), and AWS (for network switches, among others). In the past, many of these firms have relied on vendors such as Intel and AMD for high-performance chips but have recently found custom-built options to better suit their needs.
While these firms have the talent and capital to engage in chip research and design, they remain reliant on a finite number of suppliers to sustain other facets of a complex supply chain, such as manufacturing, outsourced semiconductor assembly and test (OSAT), other ancillary components of the process. Even the largest tech firms do not own their own chip fabs (Apple relies on TSMC for the chips that power its latest-generation of iPhones and M1 Macs). Furthermore, as these companies continue to specialize their own brand of silicon, the feasibility of swapping these devices out with off-the-shelf components — as could be necessary during a serious crisis — becomes less practical. While other sophisticated users of semiconductor technology — such as aerospace, industrial systems, and auto — will also be severely impacted, these firms represent global bellwethers to financial markets and in the public’s consciousness.
An assemblage of teetering blue-chip giants would have significant knock-on effects across the economy and society. While they compete on other fronts, they are natural collaborators on this issue. They will seek to leverage their considerable capital — political and financial — to increase capacity, promote resilience, and temper geopolitical risk.
The incentives for partnership between leading companies and governments are also clear. Even as legislators wrestle with issues of corporate concentration, Washington enlists these firms to power the nation’s most sensitive cloud systems, tackle health misinformation, and counter cyber threats. Public-private partnership will be as deep in addressing the semiconductor crisis as in any of these domains, as it continues to become clear this is not solely a major strategic business risk, but one with deep security and geopolitical dimensions. The scale and complexity of the semiconductor crisis — and the budget-breaking sums needed to move the needle — ensure that it will be the most pressing example of supply chain fragility through this decade.
