Semiconductors or microchips have featured in the news as automakers have struggled to source enough chips to continue production. The recovery of China’s car market in the second half of 2020 and continued global demand for lock-down electronics has driven a surge in demand for chips (FT).

This could be dismissed as another story about supply chains disrupted by the pandemic but microchips are going to play an increasingly prominent role in geopolitics and business. US sanctions against Chinese telecom equipment maker Huawei in 2019 and 2020 show how access to microchips is being weaponised. The US now requires companies to have a licence to sell Huawei any chips made using US equipment, including software.

So why will microchips continue to feature prominently in global affairs and business in the future?

💥Causes

  • Complex supply chains combined with geopolitics - COVID-19 has played havoc with supply and demand dynamics. Issues may continue as suppliers are geographically concentrated (e.g. chemicals from Japan) and prone to international interference (like US attempts to block the flow of chip-making equipment into China).
  • Reduced number of advanced chip manufacturers - the capital intensiveness of producing advanced chips has reduced the number of players to just three companies: US-based Intel, Taiwan’s TSMC and South Korea’s Samsung. These three companies have high-strategic importance to their home nations. They may find priorities dictated by nations rather than business concerns.
  • Increased demand for advanced chips - the three manufacturers described will face increased demand for advanced chips for use in AI and cloud computing.
  • Moore’s law is failing - the computational power of chips is no longer doubling every two years. This is shifting the industry’s focus away from advanced manufacturing techniques and towards new technologies (Economist).

🎯Impact

  • Potential for more shortages (business continuity risk) - as the industry faces more consolidation and greater geopolitical pressures, more shortages and disruptions could occur. Rivals to Nvidia say its acquisition of SoftBank-owned chip designer ARM could be used to control their access to its technology (FT)
  • Tech giants are designing their own chips - as Moore’s law becomes less reliable, Google, Amazon and Baidu are creating designs to improve performance and efficiency for specific uses.

💪Actions

  • Businesses: identify exposure - whereabouts could a protracted shortage in chips harm your business? Does your product use chips or run on devices or services that require them?
  • Individuals: price increases and shortages - Do you work in an industry that requires chips or invest in companies that do?

âš” Counterpoints

  • Not all chips are created equal - while there are only three manufacturers of advanced chips, around 75-80% of chips are not currently advanced products. This means that for less sophisticated chip users, there is less supply risk.
  • China can’t flex - geopolitical pressure is being exerted via semiconductor supply chains but China does not yet have an advanced manufacturing facility that could exert this kind of pressure (though it is luring talent away from Taiwan).

📚Resources