Whoever has the chips, has the power

The ongoing war in Ukraine further complicated the already difficult situation of access to raw materials. The impact of the chip availability crisis on product availability is being felt by all global economies. Regular customers were hit hard by the crisis, facing limited choice and months of waiting time. Is there anything to worry about?

Semiconductors, also known as chips, are materials that, thanks to their properties, provide liquid electrical conductivity. Putting this into the world of things, semiconductors are part of the chips that connect all our smart devices – from huge cars to small smartbands. They are usually based on silicon compounds, but they also include rare metals such as neon and palladium, the production of which is dominated by Russia and Ukraine. Chips set our world in motion, but they have been off the market for 3 years.

Trump on the wire

In 2019, shortly before the pandemic broke out, an embargo on one of the major chip manufacturers was announced by the US President Donald Trump. He accused SMIC, a major semiconductor foundry in China, of politicisation and collaboration with the Chinese military. This decision seems to have started the global crisis. It was so extensive that Apple, a technological giant working with SMIC, had to move production and temporarily block the release of IPhone 13. Huawei, on the other hand, was accused of espionage and eavesdropping, with the US completely cutting off its technology. Although evidence has never been given, Huawei practically ceased to exist on the US market.

I will buy a laptop and a console. Immediately.

The emergence of Sars-Cov-2 added fuel to the fire. The unexpected outbreak of the pandemic completely shattered the previous cycle of supply and demand, and the semiconductor crisis became a global problem. IT device purchases reached an unprecedented scale. Home offices, online classes and the common pandemic boredom made us need several times more devices than ever before. GfK analysts point out that it was around 27% more in Europe and the US, and up to 60% year-on-year in South American countries. Limited access to the workforce has become another big problem. Labour shortages caused gigantic slowdowns and production was severely reduced or suspended. A huge number of illnesses and a forced quarantine affected production lines, which ran out of qualified specialists.

The automotive industry was probably hit the hardest. A minimum of 1500 semiconductors are needed to produce a single, fairly basic model, and those packed with electronics require as many as 3000 chips. Factories came to a standstill and the supply of raw materials to the IT industry became a priority. Automotive giants such as Ford, Toyota and Subaru suspended production or closed assembly lines. Chip shortages also affected Asia and Europe – Volkswagen, Nissan, and the FCA group. Waiting time for a car at the end of 2019 was 6 to 12 months.

Fight for independence

It was realised quite late in Washington and Brussels that the chip economy is based on just a few regions in the world. It was only in February this year that the European Chip Act was announced, with its key provisions to end the semiconductor crisis. In the document, Europe declares that it has the necessary skills, tools and resources to create alternative giant factories and to become independent from imports.

The European Chip Act declares the following:

• Europe’s share of semiconductor manufacturing to increase to 20% by 2030;
• Additional investment in private and public initiatives worth $15 trillion;
• Independence from production in China;
• Investments with a total estimated value of EUR 43 trillion.

The path to economic independence is to be opened by new, multi-billion dollar investments announced by the largest chip manufacturers. Lithuania, the Czech Republic and Slovakia are competing for a Taiwanese TSMC factory. This is despite a potential deterioration in relations with China, which is Taiwan’s main competitor. US based giant – Intel – announced massive investment in Europe. Ten countries, including Poland, took part in the competition. The company’s director, Pat Gelsinger, revealed that he had already received 70 offers, which is not surprising as the investment in question is worth USD 70 billion. The Korean Samsung has been betting on the USA from the very beginning. New York, Arizona and Texas are battling for 2,000 jobs and $30 million.

War and raw materials

Semiconductors are not just compounds of silicon, but also many other elements, often so-called rare earths, which are not widely available. For example, Russia controls 44% of palladium production, while Ukraine is responsible for over 70% of neon production, which are included in microlasers – key parts in semiconductors. Although factories report that these elements will not be in short supply for now, it is worth recalling that when in 2014 Russia attacked Ukraine, neon prices rose by 400%.

Russia’s aggression against Ukraine has also caused a massive increase in the price of natural gas and oil around the world. In fact, Russia controls as much as 12% of global oil and 17% of natural gas production, as well as many other key elements for more than just chip production. Europe, which like China is dependent on imports from Russia, will be the biggest loser in this game. The Chinese government, however, has firmly dissociated itself from sanctions, so it is unlikely to have to worry about rampant energy commodity prices. The rest of the world is already feeling the consequences in their wallets.

How much further?

The European Union optimistically predicted that the end of the crisis would come in 2023. But these predictions were made long before the war broke out. Rampant inflation, rising oil prices, problems with raw materials and tensions between the main players on the semiconductor market do not promise a happy ending. Experts are wondering whether Europe’s break from established chip sourcing schemes will undermine the already difficult international relationship. If the investment plans materialise, different parts of the world will be competing fiercely in the same field and, as history shows, it is either the strongest or, equally dangerously, the cheapest who will win.

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https://www.supplychainbrain.com/articles/34725-when-will-the-chip-shortage-end-us-eu-spend-billions-in-race-to-beat-china

https://www.businesstoday.in/latest/world/story/russia-ukraine-war-to-further-worsen-global-chip-shortage-crisis-report-324776-2022-03-04

https://www.reuters.com/technology/exclusive-ukraine-halts-half-worlds-neon-output-chips-clouding-outlook-2022-03-11/

https://www.cnbc.com/2022/02/11/chinese-chipmaker-smic-posts-record-revenue-despite-us-sanctions.html