When the chips are down

It’s time to get serious about securing semiconductor supplies

JANUARY 2022 Feature / Text by Gavin Blair

Lost revenue due to the global semiconductor shortage is estimated to have topped $200 billion in the auto industry alone in 2021. And as digitalisation and connectivity continue to advance in many sectors, current manufacturing capacity and supply chains do not appear to be robust enough to meet the demand for chips, which is increasing in parallel. Added to this are geopolitical issues with the potential to further disrupt supplies.

Against this backdrop, the EU is eyeing major public investments in the semiconductor industry with the aim of making Europe, once again, a significant player and reducing its dependence on chip manufacturing in Asia. Details of the strategy will be set out in a European Chips Act due to be unveiled in the second quarter of this year. One of the central goals will be to more than double Europe’s share of global chip production to 20%, a target not everybody sees as realistic.

Shortly after the strategy was announced on 15 September, Thierry Breton, EU commissioner for the internal market, wrote: “The idea is not to produce everything on our own here in Europe. In addition to making our local production more resilient, we need to design a strategy to diversify our supply chains in order to decrease overdependence on a single country or region … [Through] the European Chips Act, we will also put the right conditions in place to preserve Europe’s security of supply.”

Meanwhile, the Japanese government is planning to provide around ¥400 billion (€3.06 billion) in funding for a chip plant to be built in Kumamoto Prefecture jointly by Taiwan Semiconductor Manufacturing Company and Sony Semiconductor Solutions. This will be the first public subsidy on that scale for a foreign company in Japan, something that speaks to just how vital chips have become.

“In Japan, it’s being seen in the context of economic security, which is the new buzzword in Tokyo,” an EU official told Eurobiz Japan.

Intel CEO Patrick Gelsinger, speaking at an event organised by the Atlantic Council think tank early this month, said of semiconductors, “If there’s a topic that deserves the involvement of governments … this is it.”

Gelsinger, along with his counterparts at Apple and General Motors, was a signatory to a letter sent to US lawmakers in December urging them to pass stalled legislation, the US Innovation and Competition Act — which contains $52 billion in funding to help make the US more competitive with China by boosting R&D and domestic semiconductor manufacturing capacity.

The US, Europe, and Japan have experienced precipitous drops in market share in recent decades. In 1990, they accounted for the lion’s share of semiconductor production; they each now have around 10% of the market. In the intervening years, chip-making has flourished in South Korea and China, but it is the stunning rise of Taiwan’s industry that has been the game changer.

The island now produces nearly two-thirds of the world’s semiconductors, much of the production outsourced from companies elsewhere, and more than 90% of the most high-tech chips.

Global reliance on an industry in a country the Chinese government has always viewed as a renegade province — and is piling increasing military pressure on — is a serious concern and a major driver of the new policies and investments.

“There is the issue of securing supply chains, especially when it comes to the most advanced chips, which is linked to the ability to act in the context of military, security, economic, or industrial policies and the ability to drive digital transformation,” said the EU official.

Any disruptions in the global chip industry, which grew in value by around 25% in 2021 to more than half a trillion dollars, now have huge implications across multiple sectors.

Christian Seidel, vice president for Japanese customers at the Prettl Group — which supplies automakers with a wide range of components, including sensor systems, lighting systems, and exhaust systems — points to an example of such knock-on effects.

“If any one supplier is struggling to get semiconductors and, therefore, can’t furnish its products to BMW, for example, production at the carmaker grinds to a halt,” he says. “So, it doesn’t help if we ourselves have stocked up on integrated Hall-effect circuits for our steering sensor assemblies. Demand from BMW for our assemblies will take a hit.”

Also, the transformations happening within the automotive industry, in terms of electrification and autonomous driving, mean that manufacturers “are literally turning their cars into interconnected high-end computers,” notes Seidel, who says the accompanying changes in safety features are “further fuelling the demand for microchips and sensors”.

Bosch, another major supplier to the automotive sector, has also been hit by the semiconductor shortage. This was exacerbated by a number of factors including Covid-19-related production stoppages at other manufacturers, weather events, and a fire at one of Japanese chip-maker Renesas’ plants in Japan in early 2021.

“Unfortunately, this situation cannot be expected to improve any time soon. Indeed, it seems likely that the entire industry will be confronted with this unsatisfactory situation for many months to come,” a Bosch Japan spokesperson told Eurobiz Japan. “Moreover, the current bottlenecks are also having an impact on our business development.”

Chemical and pharmaceutical firm Merck produces materials used in semiconductor manufacturing, and it has been able to keep supplying its customers, according to spokesperson Miki Ikejiri, though it also expects shortages to continue for the time being.

“Our facility in Shizuoka cooperates with companies as an innovation partner in Japan and also supplies manufacturers overseas,” explains Ikejiri, who adds that the firm is investing to increase capacity in expectation of continued high demand.

Merck invested €20 million to boost capabilities at the R&D and manufacturing plant in Shizuoka in 2021. And the firm is planning further investment there as part of what it calls its Level Up programme, where it aims to spend €3 billion globally by the end of 2025 on its electronics division.

Although nobody is expecting the shortages to end soon, Prettl’s Seidel believes there may eventually be a reversal of the current situation.

“Chances are that by having shored up local production across the globe, we’ll end up with a supply glut for some chip types,” he says.

He points out that, “if regions want to be more independent — or be on the safe side, if you will — then there have to be some redundancies in the supply chain, and that means excess quantities.” •