A Global Chip Shortage In Supply Of Semiconductor Chips, Caused By A Unique Combination Of The Coronavirus, Climate Change And Donald Trump.
Last week, Samsung announced that the rollout of its new Galaxy Note smartphone would be delayed, warning of a “serious imbalance” in the chip industry. It’s just the latest impact of A Global Shortage In The Supply Of Semiconductor Chips, Caused By A Unique Combination Of The Coronavirus, Climate Change And Donald Trump.
Semiconductors are the brains of all things electronic. Like the brain, they perform different functions—memory, processing—and range in sophistication from standard, repetitive routines to high-performance chips that can support machine learning, artificial intelligence and high-end graphics. All things electronic these days are pretty much all things chips. They are needed not just for the obvious devices like laptops, phones and tablets, but for the whole range of smart devices, including autonomous vehicles, light bulbs, refrigerators—even cities. And thanks to advances in miniaturization, the world of transistors has become truly Lilliputian: Up to 1,000 transistors can now fit on a cross section of human hair
Like so many other tech hardware markets, chip manufacturing involves highly specialized and consolidated global supply chains. The intellectual property in the designs is generated by one set of players, such as Intel, NVIDIA, AMD or the U.K.’s Arm, which started life in an old Cambridge turkey barn and is now one of the world’s leading chip designers. Two U.S. companies—Synopsys and Cadence Design Systems—are market leaders in the software that’s essential for taking chip designs to production. And lastly, there are the semiconductor foundries, of which the leading players are Taiwan Semiconductor Manufacturing Company Limited (TSMC), Samsung, and China’s Semiconductor Manufacturing International Corporation (SMIC).
The COVID-19 pandemic has abruptly changed purchasing patterns, and the car industry has been particularly affected. When demand for new cars collapsed in early 2020 when the pandemic struck, production was reduced. At the same time, it seemed that everyone who was sitting at home on lockdown decided to buy new gear: laptops, phones, TVs, you name it. The surge in demand has meant that when the car industry started to ramp up production in response to the rollout of COVID-19 vaccines this year and the anticipated return to near-normal, it found that the chip manufacturers were busy supplying other industries. As cars are now essentially computers with wheels, no chips means no new cars
Climate change played its part, too. When Texas froze over in February, it halted production at several chip foundries near Austin. The process of spinning silicon wafers—as the semiconductor jargon describes manufacturing chips—requires the controlled use of toxic gases and ultra-clean environments, where a single spec of dust can act “like a boulder” falling on the transistors. This means that when there’s a power outage, production has to stop. Otherwise, there’s a potential hazard as the toxic gas monitors stop working without that power. Anything that’s in production during a power outage is lost, and it can take days or weeks to restart manufacturing. Samsung, which was affected by the Texas outage in mid-February, had still not resumed manufacturing by March 17. The complexities of the manufacturing process mean that it takes time to switch production—say, to serve the car industry rather than consumer electronics.
The final factor that has contributed to the current shortage is the impact of the U.S.-China trade war that has been rumbling on since 2018. In 2020, the Trump administration imposed trade sanctions intended to deny certain Chinese companies, like telecom giant Huawei, access to U.S. intellectual property required for the manufacture of semiconductors. It was these sanctions that finally sunk Huawei’s hopes of supplying the United Kingdom with its 5G infrastructure. In one way, the chip sanctions are microtargeted, unlike the disastrous and sweepingly wide entity list drafted by the Trump administration in 2019, which was hastily suspended after it became clear that it would harm U.S. economic interests and American companies, too, such as Google’s Android platform on Huawei phones.
Understanding that the semiconductor market is highly consolidated, the chip sanctions leveraged the chokepoint controlled by U.S. software providers in taking chips from design to production. American software is an indispensable part of the global semiconductor supply chain. The Biden administration has an opportunity to adopt a more thoughtful approach to the technological rise of China. What happened next was both foreseeable and illustrates the perverse consequences of a blunt instrument like sanctions. Chinese firms started to stockpile chips, contributing to today’s global shortage. Once people get spooked about shortages, they order more than they need, which creates even more shortages. Think toilet paper at the start of the pandemic.
Sanctions often backfire by harming the commercial interests of allies and the sanctioning country’s own domestic companies, as much as the target country. When the U.S. chip sanctions hit Huawei last year, they removed a major revenue stream for TSMC, the world’s largest chip foundry, based in Taiwan. Then, in September, the Trump administration applied sanctions on Chinese chip foundry SMIC directly, claiming that it might be supplying the Chinese military and thus posed an “unacceptable risk.” While dealing a blow to China’s chip supply, the sanctions also hurt American companies, such as Qualcomm, believed to be SMIC’s second-largest customer.
The other thing that happened is that the sanctions redoubled China’s resolve to reduce its reliance on foreign suppliers, particularly for components such as semiconductors, which are essential for its plans to become a technological superpower. China faces considerable challenges in attaining that goal of self-sufficiency, but with renewed motivation, coupled with state support and strategic foreign investment in research and development, it is likely to succeed.
The U.S. sanctions on semiconductors had yet another impact: They changed the British government’s intelligence assessment on Huawei. Even if Huawei were to succeed in the difficult task of creating new design tools and manufacturing processes for chips without using U.S. technology, the U.K. would no longer be able to be confident in its ability to mitigate security risks associated with Huawei as a “high-risk” vendor. Prior to that, the U.K. had successfully worked with Huawei as a mobile infrastructure provider for 17 years, with security and quality assurance monitored through a dedicated Huawei Cyber Security Evaluation Centre.
The Biden administration has an opportunity to adopt a more thoughtful approach to the technological rise of China. Trade wars and sanctions risk fracturing markets and hurting your own businesses as much as your opponents’. These blunt instruments also undermine a key driver of peace: the economic entanglement that comes with global supply chains. Self-sufficiency reduces the sense of restraint that mutual dependence brings to states. A containment strategy will, at best, only delay China achieving its ambitions, and may have the unintended outcome of accelerating its drive for technological self-sufficiency.
Chips are in every computer. Everything today is a computer, so chips are in everything. The first two factors upending the global supply of semiconductors today—the pandemic and climate change—are difficult to address, although, for our survival, we do have to address them. The third—the Trump-era sanctions—may not be easy to resolve, but they fall more readily into the sphere of attainable policy interventions.
There is a real need for the U.S. and its allies to reassess its strategy toward China on tech. Last week, the British government published a roadmap for its foreign policy after Brexit, known as the Integrated Review, under the tag line “Global Britain in a Competitive Age.” It aims, among other things, to forge a middle way with China—minimizing security threats while seeking positive engagement and desperately needed investment in the post-Brexit economy, where feasible. It remains to be seen whether this more moderate approach to Beijing survives the scrutiny of the right wing of the ruling Conservative party. But it is certainly a more constructive route than the capricious, zero-sum policies of the previous U.S. administration.
This news was originally published at World Politics Review.