From 2020 to 2022, a global shortage of semiconductors caused significant disruptions to multiple sectors ranging from automotive to consumer electronics. This scarcity has now been alleviated due to a rebalance of global supply and demand. In 2023, semiconductor sales declined by 8.2% Year-on-Year to $527 billion (€ 474 billion) because of market cyclicality and economic uncertainty. Most notably, demand from the communication and computer equipment markets, the top two end markets, contracted by 1.8% and 7.1% respectively during that year. However, the industry is projected to achieve a double-digit annual growth in 2024 given the rising demand from the artificial intelligence and vehicle electrification sectors. Despite the positive economic forecast, the global semiconductor supply chain is confronted with several risks stemming from the current geopolitical instability.
Restrictive trade measures hinder flow of advanced technology
Out of concern over national security, the United States and its allies, such as the Netherlands and Japan, have implemented a series of restrictions on the export of and investment in semiconductors and certain related equipment to curb China’s development of advanced chips. In retaliation, the Chinese government restricted the export of minerals including gallium, germanium, and graphite. License requirements were imposed on exporters of the above-mentioned raw materials. Starting on October 1, the country has also tightened controls on rare earth minerals. The new regulations declared all rare earth minerals and reserves state-owned assets. Exporters of 17 types of minerals will now have to disclose the end use and end users of these minerals. As a result, wafer producers may experience longer lead times or a failure to source europium, a key material for semiconductor dopant. In addition to general export controls and investment curbs, the Chinese government has targeted U.S. chipmakers. In May 2023, the memory chip producer Micron Technology, Inc. was banned by the Cyberspace Administration of China from selling products to certain government bodies and organizations for failing a security review. Moreover, Intel Corp. had to terminate a $5.4 billion (€4.9 billion) acquisition of Tower Semiconductor Ltd. in August 2023 due to the absence of approval from Chinese authorities.
For non-Chinese companies, such restrictions will result in a decline in revenue due to the loss of China as the largest semiconductor market in sales, which amounted to $92.1 billion (€83,5 billion), or 34% of the global market in 2020. On the other hand, Chinese companies will have to cope with significant delays in developing advanced chips, such as the Semiconductor Manufacturing International Corp.’s (SMIC) postponement of its Beijing plant due to difficulties in procuring equipment. Chipmakers will instead have to focus on developing legacy process (with 28-nm or larger) products. However, this could potentially bring about overcapacity, and tariffs from Western countries down the line.
Tensions between China and Taiwan remain a major risk after the island inaugurated the pro-independence President William Lai in May. Three days after the inauguration, China conducted two days of military drills surrounding Taiwan as punishment for alleged separatist acts. It also launched a one-day military exercise surrounding the island on October 14 in response to a recent speech given by President Lai. The number of Chinese aircrafts crossing the Median Line in the Taiwan Strait has stayed above 150 since May, representing a peak only second to the record high of 302 crossings in August 2022 when then-House Speaker Nancy Pelosi visited the island. China has also suspended tariff concessions on over 160 goods from Taiwan, affecting goods such as agricultural products, chemicals, and machines. Although without noticeable disruptions to the semiconductor supply chain so far, these patterns underline the persistent risk of an escalating China-Taiwan dispute that could lead to further economic coercion or an invasion by China. These simmering tensions are of particular concern for the global semiconductor market given Taiwan’s role as the world’s semiconductor hub accounting for nearly 60% of global wafer output.
Chipmakers brace for rising number of cybersecurity threats
The semiconductor industry is especially vulnerable to cybercrime practices due to its highly specialized supply networks. On June 12, GlobalWafers Co., Ltd., the world’s third largest silicon wafer producer, suffered a ransomware attack by an unknown entity. The company had to shut down parts of its operating system to avoid further damage. The shutdown of its information system brought about a six-day operational impact, affecting multiple factories. Similarly, the U.S. semiconductor firm Microchip Technology Inc. experienced a cyberattack by the Play ransomware group on August 17. Multiple manufacturing sites of the company had to operate at reduced capacity, disrupting order fulfilment for an unspecified duration. Considering its significance in both end uses and economic value, the industry is becoming a likelier target of state-backed hackers.
Global semiconductor manufacturing networks are also at risk of cyber-related disruptions outside of their own manufacturing plants. Heavily reliant on air freight for transportation, the semiconductor industry faces additional risks concerning the movement of components. Most recently, a global network disruption caused by a flawed-CrowdStrike update shut down Microsoft devices globally and paralyzed major airports worldwide. Although it was later revealed as a technical glitch, it underlined the air freight sector’s vulnerability to sudden system disruptions as well as the risk of sudden disruptions to the movement of goods such as semiconductors via air.
Semiconductor network to undergo geographical reshape
The current semiconductor supply chain stands vertically fragmented and horizontally concentrated. A geographical structure where most manufacturing facilities are housed in Asian countries has contributed to cost savings in the past. However, supply bottlenecks during the COVID-19 pandemic highlighted the necessity of diversifying supplier networks away from a specific region. Policymakers around the world have introduced various incentives to attract domestic semiconductor investments. The United States has announced the CHIPS and Science Act providing $52 billion (€46.7 billion) in subsidies for chipmakers building or expanding facilities in the country. The European Union has also announced the European Chips Act to attract semiconductor projects to the region. In Asia, South Korea has introduced a plan including investment of up to $19 billion (€17.1 billion) to construct semiconductor parks and infrastructure. Aiming to achieve self-reliance in the sector amid international trade restrictions, China has also launched the third phase of the National Integrated Circuit Industry Investment Fund worth $47.5 billion (€42,7 billion).
An investment of $229 billion (€ 205 billion) has been injected into semiconductor facilities in the U.S. alone so far, which are scheduled to begin operations between 2021 and 2030. South Korea has taken the second place as the top destination of semiconductor investments, followed by Taiwan, China, and Japan. Major chipmakers have also announced plans to construct plants in Europe and Southeast Asia. This is expected to reshape the semiconductor supply chain into a more diverse and resilient one.
However, the process of diversification can still be disrupted by multiple uncertainties. Short-term challenges including inflation-led high costs and delays in government subsidies have postponed Samsung Electronics’ plant in Taylor, Texas to after 2026. The company is facing financial challenges because of low demand for memory chips, and has shut down half of the production lines at its Pyeongtaek foundry in South Korea to reduce costs. Moreover, Intel Corporation recently decided to pause for two years the construction of the $4.6 billion (€4.1 billion) plant in Wroclaw, Poland and the $33 billion (€30 billion) facility in Magdeburg, Germany due to financial constraints. Several chemical and material suppliers to Taiwan Semiconductor Manufacturing Co. (TSMC) and Intel Corp. have also delayed their projects in Arizona for similar reasons.
Shortages of water and electricity constitute major challenges in the long-term, especially for foundries planned in countries with less stable infrastructure. In August 2024, authorities in Penang State, the silicon valley of Malaysia, urged the public to reduce water usage in the face of low water levels at dams due to dry weather. A foundry consumes 10 million gallons of ultrapure water per day, while 1,400 to 1,600 gallons of municipal water is required for 1,000 gallons of ultrapure water. Intel Corp., Micron Technology, Inc., and Infineon Technologies AG would be at risk of disruptions at their planned facilities if drought occurs on the island of Penang in the future. The power grid system in Vietnam also lacks resilience that semiconductor facilities require. Electricity outages affected over 5.7 million households in northern Vietnam due to the impacts of Typhoon Yagi, approximately 1.5 million of which were without power for two days. Such vulnerabilities could be detrimental to facilities of Amkor Technology Inc. in Bac Ninh and that of Samsung Electronics Co., Ltd. in Thai Nguyen. Lastly, a lack of skilled engineers could cripple the planned expansions even in richer countries. For example, the U.S. market is projected to see a talent shortfall of 67,000 engineers by 2030 despite its lead in the share of investments poured into semiconductor facilities.
Vulnerabilities in the sub-tier remain a high risk
On September 26, Sibelco Group and the Quartz Corp. suspended operations at their quartz mines in Spruce Pine, North Carolina, United States due to floods caused by Hurricane Helene. Flooding severely damaged infrastructure including roadways, rail tracks, and transmission lines in the town. Sibelco resumed operations on October 10 after a closure of more than two weeks, while Quartz Group announced on October 23 that it had started to gradually resume operations, but cautioned that it will take several week before production at the facility returns to normal. Damage to the latter company’s facilities was only limited to ancillary units without affecting those directly related to mining operations.
The mines in Spruce Pine provide approximately 80-90% of the global supply of high-purity quartz (HPQ), a crucial component of monocrystalline silicon used to manufacture semiconductors and solar panels. The mineral can be processed at extremely high temperatures under tightly controlled conditions. Due to this property, HPQ is used to manufacture crucibles, a container of melt silicon to grow single crystal silicon, which is then sliced into wafer, the key material of semiconductors. This equipment has to be replaced after 400 hours of service, whereas an estimated 70-90% of crucibles across the world are made of HPQ from Spruce Pine. Additionally, the maximum purity of monocrystalline silicon is linked to the purity of the quartz. Products refined from HPQ are equipped with higher purity and hence higher conductivity.
Although the temporary shutdown of the mines in Spruce Pine was not expected to cause significant disruptions to manufacturing operations due to existing stocks, it has shed light on the vulnerabilities of the semiconductor supply chain due to the high concentration of certain raw materials.
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