Semiconductors: What are they?
Semiconductors (also called microchips) are integrated, miniaturized electronic circuits interconnected on a thin wafer of semiconductor material, typically silicon. Modern semiconductors are a few square millimeters with billions of composite electronic components.
Semiconductors are vital components of most electronic systems, including smartphones, automobiles, computers, critical infrastructure networks (including communication and information networks), aerospace systems, industrial equipment, and modern defense systems. Entire economic sectors including transportation, healthcare, energy, telecommunications, financial services, and defense rely on semiconductors. Semiconductors will also be critical components of emerging technologies such as artificial intelligence, 5G networks, autonomous electric vehicles, smart devices, and Internet of Things (IoT) systems.
There are three broad types of semiconductors:
- Logic semiconductors: the brains of computing.
- Memory semiconductors: store information.
- Discrete, Analog, and other (DAO) semiconductors: transmit, receive, and transform information to facilitate tasks such as temperature and voltage control, radio signal reception, and optical sensors.
The Global Semiconductor Shortage
In 2020, a severe global shortage of semiconductors emerged due to supply chain issues. The shortage has worsened in 2021 and some experts, such as Intel CEO Pat Gelsinger, predict that the shortage will continue to worsen throughout 2021 and others predict it could last through 2022 or 2023. The shortage has hit the U.S. auto industry particularly hard, with Ford estimating a 20% production cut in early 2021 and General Motors cutting output at its North American factories. Altogether, the shortage is predicted to cost the global automobile industry $210 billion in 2021 and result in the production of 7.7 million fewer vehicles than planned.
The semiconductor supply chain shortage has both immediate and systemic causes.
Immediate Causes:
- COVID-19 Pandemic: In early 2020, automakers slashed orders for semiconductors due to the initial COVID-19 economic slump. Meanwhile, demand for chips for computers, cellphones, laptops, and other work-from-home electronic devices skyrocketed. Semiconductor production therefore shifted to meet the home electronics demand. However, when the economy and automobile demand recovered faster than expected, chip manufacturers couldn’t quickly reallocate production since chips are highly specialized and can take up to 26 weeks to produce, resulting in a misalignment of production supply and demand.
- Texas Winter Storm: The severe winter storm and power outages in Texas in February 2021 forced the Renesas and Infineon semiconductor plants to shut down for several weeks.
- Drought in Taiwan: Taiwan's worst drought in 56 years left the island with most of its reservoirs falling below 20% capacity in 2021. As semiconductor manufacturing requires significant water resources, the scarcity has forced a production slowdown on the island that accounts for a significant portion of global semiconductor production.
- Fire in Japan: In March 2021, a fire at a Renesas semiconductor plant in Japan caused severe damage and the plant took months to resume full production.
- U.S.-China Trade Disputes: During the Trump Administration’s 2018 trade war with China, the U.S. placed a 25% tariff on imported chips and placed Chinese semiconductor companies on blacklists to prevent their acquiring of advanced U.S. semiconductor equipment. This trade dispute disrupted U.S.-China supply chains and Chinese buyers hoarded chips due to fears over tightening U.S. export controls.
However, even when these immediate events are resolved, the semiconductor supply chain will not be fully secure. Rather, these immediate problems are indicative of broader, systemic issues within the semiconductor industry that will continue to pose a risk to supply chains.
Systemic Risks:
Supply Chain Complexity: The supply chains for semiconductors are extraordinarily complex, expensive, long, and specialized.
Manufacturing semiconductors requires nearly 300 different inputs, from raw wafers to chemicals and gases. Manufacturing also requires over 50 highly complex tools and machines, sourced globally. Producing a single chip can take up to 26 weeks and due to the highly specialized production steps in different countries, a chip can cross international borders 70 times before completion. Chips themselves are not interchangeable and each must be designed and manufactured for a specific purpose, thereby limiting flexibility.
Geographic Concentration: Semiconductor production is highly geographically concentrated in East Asia. In the manufacturing stage, 75% of global chip production takes place in Taiwan, South Korea, Japan, and China. There are only two firms in the world (Samsung in South Korea and TSMC in Taiwan) that have the capabilities to produce the most advanced 5-nanometer chips. There are globally 360 facilities that carry out the final stage in production, Assembly, Test, and Packaging (ATP), with over 100 in China, 100 in Taiwan, and 43 in Southeast Asia. This geographic concentration poses severe risks. A single natural disaster, trade embargo, or military conflict in East Asia could cripple the entire global semiconductor supply.
Rising Global Demand: Semiconductors are crucial components of all emerging technologies from 5G networks to AI and green electricity. Semiconductor demand will continue to increase approximately 4-5% per year, with an estimated need for an increase in semiconductor manufacturing capacity of over 50% by 2030. Yet constructing a single semiconductor manufacturing facility can cost upwards of $20 billion. Additionally, semiconductor chip technology is rapidly increasing, as is demand for more advanced, and therefore more complex and expensive, chips. For example, Apple uses a 5-nanometer chip (currently the most advanced chip widely commercially available) in its most advanced products including the iPhone 12, but researchers are already developing 3nm chips and in May 2021 IBM unveiled the world’s first 2nm chip.