The pandemic and the recent geopolitical events have caused massive supply chain disruptions and the shocks have been felt by almost every industry. Semiconductor industry had been one of the most severely affected and a widespread shortage of essential chips was seen until recently. The industry is slowly getting back on track but the governments and companies all around the world have come to realise how vulnerable the supply chains have been and how important it is to build resilience in the supply chain.
Semiconductors drive the modern digital economy right from technology devices, automotives, cloud infrastructure, machinery, robotics, IoT devices, defence & space systems and a lot more. Semiconductors are now considered an essential commodity which can suddenly cause massive tremors if availability becomes scarce. Semiconductor manufacturing process is quite complicated and has a long lead time ranging from 2-6 months and therefore it is a lot more sensitive to any demand or supply side fluctuations and the disruptions are amplified a lot more as a result.
The story so far…
The semiconductor industry has traditionally operated with an outsourced manufacturing model where high value adding activities like R&D and design are primarily driven out of the US and much of the manufacturing capacity lies in cheaper manufacturing destinations like China and East Asia. This has kept the costs low and has helped fuel the rapid growth of information technology over the last few decades. But this has also created single points of failures in the value chain because of a large dependency on a select few countries especially China.
Some smaller chips for example are fabricated exclusively in Taiwan which makes it highly vulnerable to any geopolitical tensions in the region or other disruptions related to climate or health emergencies.
The war in Ukraine has also taught important lessons to the governments and companies where an essential commodity like natural gas is at the mercy of Russia who controls much of the supplies and European countries have been found over exposed.
The move towards resilience
To prevent an essential commodity like semiconductors from succumbing to such disruptions, governments in the west have stepped in with legislation which aims to build resilience, drive investment into local economies and safeguard national interests. Leading the charge is the US government who recently signed the ‘US CHIPS and Science Act‘ which will provide incentives to semiconductor companies for manufacturing the chips in the US. There is already an investment of $50bn announced by semiconductor companies in the US for setting up new fabrication units. The European Union has also started consultations on a similar regulation called the ‘European Chips Act’ which aims to advance the EU’s share in the global semiconductor manufacturing capacity from current 10% to 20% and increase research and innovation into smaller chips. Similarly, India aims to be self-sufficient in chip manufacturing and has announced ‘India Semiconductor Mission’ which will provide subsidies of up to $10bn and a shared project cost of up to 50%.
Supply chains all over the world are in great distress and this is leading to a tectonic shift in the ways companies are thinking and adapting to the changing circumstances. Globalisation which was a bedrock of development and thriving economies over the last 50 years is perhaps moving towards more localisation. We can expect this trend to continue especially for products or commodities which are considered essential.
What does the future hold?
Localisation as we know will affect the prices of these items differently. For example, products which are manufactured in high income countries will tend to have higher prices as the economies of scale due to mass manufacturing and labour arbitrage may not be achievable. But this could equally drive the overall prices down because of a larger global capacity and more product availability. Natural resources like gas, which are seeing record high prices because of the current scarcity created by the war, should see prices coming down once resilience is built into the supply chains by countries and alternative supplies become available. One thing is clear that the supply chains will definitely get a boost as they head towards building resilience and a sense of normalcy can be felt sooner rather than later once things get back in order.
Photo by Christian Wiediger on Unsplash