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There’s a global race to manufacture semiconductor chips

Capex budgets across the world, from Taiwan to South Korea to China to the US, have increased to bolster the manufacturing and supply of semiconductors

September 28, 2021 / 10:08 AM IST

With most of the population locked inside their homes, the demand for consumer electronics skyrocketed while production dropped as factories were intermittently closed because of local outbreaks. Chip stockpiling in anticipation of supply difficulties by few companies made the situation worse. The crisis even got a new name: chipageddon.

Even though the pandemic situation has eased, the chip crunch does not show any signs of abating. As per a Bank of America’s note to clients, supply constraints on semiconductor wafer and substrates would only partially ease in the second-half of 2021, while the tight supply of some leading-edge (computing, 5G) chips would extend into 2022 until the completion of inventory replenishment.

The semiconductor industry is substantially increasing its fab capacity utilisation to meet the demand springing up at a faster-than-expected pace. Yet, increased utilisation alone cannot meet the long-term demand growth for microprocessors, and chipmakers need to increase production capacity.

Chip manufacturing is a capital and R&D-intensive process. A report from Counterpoint Research shows that most tier-two foundries have been registering poor earnings, low margins, and high debt ratio during the past few years, and thus will be unable to expand production capabilities. Hence, the onus rests on the shoulders of the major players. With a record annual capex budget, the world’s leading foundry Taiwan Semiconductor Manufacturing Co. (TSMC), pledged to invest $100 billion over the next three years. Under its Vision 2030, the world’s top memory chipmaker — Samsung Electronics Co. — announced to invest a total of $116 billion in this decade. In its ‘Engineering the Future’ webcast, Integrated Device Manufacturer (IDM) Intel unveiled its plan to build two new factories worth $20 billion in Arizona by 2023.

The crisis has exposed geopolitical vulnerabilities well. Although the United States leads in developing the design of ICs, Taiwan and South Korea dominate the manufacturing. TM Lombard economist, Rory Green, estimates that Taiwan and South Korea account for 83 percent of the global production of processor chips, and 70 percent of memory chips. The US share of global chip production has declined to 12 percent from about 37 percent in 1990. A lobby group in the US called the current crisis ‘a canary in the coal mine’ for future supply-line shortages.

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Pivoting on the chip-making business, the US Senate passed CHIPS for America Act under part of the National Defense Authorization Act (NDAA) last year. In June, it passed the United States Innovation and Competition Act (USICA), which includes funding for Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act. The Act will provide $52 billion for production and research on semiconductors, including $2 billion dedicated for auto-chips. The following week, lawmakers introduced a bipartisan Bill giving 25 percent tax credit for semiconductor manufacturing equipment and facilities investments. Though the US administration has gone all out in reclaiming its position as the leader in semiconductors, it will take considerable time to yield up.

Meanwhile, China has also ramped up efforts to combat the dual challenge of chip shortage from the pandemic and US sanctions. Apart from pumping large amounts of money in research as well as loans, Beijing has provided tax incentives to the whole semiconductor ecosystem, including IC manufacturing, IC design, IC equipment, IC materials, IC packaging, and IC testing enterprises. Chinese companies have resorted to poaching engineers from top Taiwanese foundries to fill the talent void, which has compelled Taiwan to retaliate. Reiterating that hi-tech talent is an essential issue of its national economic policy, Taipei told local staffing companies to remove all job listings in China. Moreover, it launched an investigation into recruitment firms allegedly hiring local semiconductor talent for mainland Chinese chipmakers.

The impact of the Sino-US trade war has reached Europe. The US pressurised the Dutch company ASML to block sales of extreme-ultraviolet lithography machines to China. Inundated with the demand for advanced lithography machines, ASML is facing the challenge of prioritising customers.

The European Union has also woken up to the alarming hazards of relying on Asian and US semiconductor supply chains. In her annual State of the Union speech last week, European Commission President Ursula von der Leyen expressed the urgency to create a “state-of-the-art European chip ecosystem,” including designing, testing, production, and insurance. She announced the plan to propose a ‘European Chips Act’ to increase the European share in the global chips market to 20 percent by 2030.

Ursula von der Leyen rightly said it is not just a matter of competitiveness but also of “tech sovereignty”. One thing is for sure, the ever-frantic technological race is not going to slow down anytime soon.

(This article first appeared in the ORF.)

Saranya is Research Intern with the Centre for Security, Strategy and Technology, ORF.

Views are personal and do not represent the stand of this publication.
Saranya Saranya is Research Intern with the Centre for Security, Strategy and Technology, ORF.
first published: Sep 28, 2021 10:07 am

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