Localizing the global semiconductor value chain

Semiconductors are the bedrock of modern information and communications technologies (ICT). Within a highly globalized yet specialized semiconductor value chain, seismic shifts are underway amid supply chain challenges stemming from geopolitical issues and demand-supply imbalances. Global interdependencies characterize the supply chain, highlighting vulnerabilities to environmental, geopolitical, economic, and technological risks. Consequently, governments must proactively anticipate and adeptly navigate global intricacies as they architect robust and efficient local semiconductor industries intertwined with the global value chain and yet sufficiently localized to ensure both local economic benefit and resilience against potential future chip shortages.

Recent global events, including natural disasters, geopolitical conflicts, and trade disputes, have stressed the semiconductor industry, leading to supply shortages and economic impacts. Environmental risks like droughts and pandemics disrupt supply chains, while economic risks such as demand surges strain production capacities. Technological risks, including cyberattacks, compromise operational efficiency and data security. Trade disputes, particularly between the US and China, further disrupt supply chains and market stability.

To address these challenges, governments are implementing various countermeasures to bolster semiconductor supply chains. Localization efforts aim to enhance industry resilience and reduce reliance on foreign suppliers. Initiatives like the US Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act and the European Chips Act incentivize domestic semiconductor manufacturing and innovation. Countries in regions around the globe are investing heavily in semiconductor development to secure supply chains and drive economic growth.

Scaling up the semiconductor industry requires fostering engineering talent, promoting end-application industries, and navigating geopolitical complexities. Governments must review fiscal measures, attract skilled talent, and support industries that rely on semiconductor technology. Collaboration between countries and strategic investments in emerging and frontier semiconductor technologies are essential for sustaining industry growth.

1 EMPOWERING ICT: THE CRUCIAL ROLE OF SEMICONDUCTORS

The semiconductor industry is of strategic importance to a country’s economic development, technology development, and security. Besides being critical building blocks for security and defense applications, semiconductors are also essential enablers for several industrial applications, numerous physical applications or products, and software-enabled technologies like the Internet of Things (IoT) and AI. These applications span industries, products, and functions.

Industry

Automotive. Semiconductors are essential in automotive technology and power electronics, driving crucial systems like engine management, safety features, and infotainment, enhancing both performance and safety in modern vehicles.
Aviation. Semiconductors power essential aviation functions, including flight controls, navigation, and communications, ensuring safety and efficiency in modern aircraft.
Energy. Semiconductors are the basis for renewable energies, such as solar power and wind turbine energy systems. They are used for essential processes like power conversion as well as transmission of power to the grid.

Products

Sensors. Semiconductors are used to create sensors that can detect light, heat, motion, and other physical phenomena.
Modern medical devices. Medical devices combine life sciences and semiconductors for wellness and healthcare. These can include wearable sensors for health monitoring, medical robotics, advanced imaging technologies for high-resolution ultrasound, neural interface technologies, and implantable devices for trauma intervention.
These technologies may rely on advanced semiconductors to assist with data collection and processing for actionable feedback or to help navigate within the body for appropriate treatment.

Functions

Computing. The semiconductor industry produces microprocessors and memory chips, which are the primary components in computers, servers, and data centers. These devices are used in various industries, from finance and healthcare to manufacturing and logistics.
Communications. Semiconductors are used to produce cell phones, satellite systems, and other communications devices. They are also used to create routers, switches, and other networking equipment that enable communications between devices.
IoT. Semiconductor chips are used in IoT devices to run both business and personal errands. As reliance on IoT devices grows, there will be a further increase in demand for sensors, memory, connectivity, and so on.
AI. Semiconductor chips are pivotal for high-tech manufacturing and are crucial for enabling AI. Semiconductor design improvements for AI focus on increasing the data speed of memory with more power efficiency.

The global top 30 technology equipment companies include semiconductor companies, such as NVIDIA, Taiwan Semiconductor Manufacturing Company (TSMC), Samsung, Broadcom, and ASML, among others. These top 30 firms collectively represent ~85% of the total market capitalization (as of April 2024) of the top 100 technology equipment firms. All play a role in the global supply and demand of semiconductors and semiconductor equipment.

The global semiconductors market value was US $527 billion in 2023, with demand driven by end consumers spanning various industries, as shown in Figure 1.

Figure 1. Global semiconductor market and breakdown by application

2 DECODING TODAY’S SEMICONDUCTOR VALUE CHAIN

The semiconductor value chain is complex and truly global, with an interconnected network of geographically diverse companies that design, manufacture, and distribute semiconductors. The industry is characterized by high specialization spread across geographic areas, high barriers to entry due to significant R&D investment costs, large CAPEX, and volatile demand.

In the value chain (see Figure 2), there are a few regions that hold the majority of global market share. For example, more than 70% of the global semiconductor foundry capacity for mature process technologies (28 nanometers [nm] and older) is concentrated in China and Taiwan (see Figure 3), a region significantly exposed to high geopolitical tensions. In addition, close to 70% of the world’s advanced semiconductor manufacturing capacity (including 16/14 nm and more advanced technologies) is also currently located in Taiwan.

Figure 2. Semiconductor value chain overview (main actors)

Figure 3. Distribution of foundry capacity by region, 2023

Despite this concentration, strong global interdependencies characterize the supply chain, with the US, Europe, and Japan upstream (equipment and tools); Taiwan and South Korea, where most advanced semiconductors are produced, in the middle; and China, which incorporates chips into final goods, downstream (back-end assembly and test).

Semiconductor materials vary in price and availability, from abundant silicon to difficult-to-source rare-earth elements like gallium, germanium, and scandium. China dominates the raw materials production, such as for silicon, gallium, germanium, and scandium (see Figure 4).

Figure 4. Global critical raw material supply chain (largest players)

Other countries that are key providers of raw materials for the semiconductor industry include Germany, the US, Russia, Japan, Malaysia, and France. Ukraine is also a key supplier of noble gases, such as neon, argon, krypton, and xenon, which are essential for use in semiconductor chip production processes. Without raw materials, chips cannot move off the drawing board into production.

In the global semiconductor supply chain, Figure 5 illustrates a typical journey of a smartphone application processor.

Figure 5. Smartphone processor journey from conception to creation

A complex and interconnected global network of partners remains essential for producing a single semiconductor chip. The supply chain for semiconductor production remains deeply interdependent on a global scale. International collaboration remains critical for the foreseeable future, in spite of deepening risk factors that threaten the stability of this supply chain.

3 TURBULENCE IN SEMICONDUCTOR INDUSTRY: RECENT EVENTS

The global structure of the semiconductor supply chain, which is highly specialized, has served the industry well through the boom cycles of innovation of end-user ICT and its consecutive adoption. However, over the last few years, several factors have induced stress on this well-functioning structure and have put this model at risk. Broadly speaking, there are four main risks the semiconductor industry faces: (1) environmental risks like natural disasters or extreme weather can disrupt semiconductor supply chains; (2) economic risks that result in demand spikes or supply gluts can impact sales and production; (3) technological risks, including cyber threats, can compromise manufacturing and data security in the semiconductor sector; and (4) geopolitical risks, including trade disputes and restrictions, may hinder the global flow of materials. Below, we break it down further:

Environmental risks. Natural disasters, pandemics, and extreme weather events affect the supply of semiconductors due to disruptions in their operations. Recent examples include:
- Winter storms. In 2021, a winter storm in Austin, Texas, USA, led major players such as Samsung to shut down operations at least temporarily. These shutdowns affected older semiconductor facilities, possibly reducing smartphone output for Samsung.
- Droughts. The 2021 Taiwan drought raised manufacturing expenses for TSMC, a significant water-consuming semiconductor company. TSMC, using over 150,000 tons of water daily, faced challenges due to minimal rainfall. The company is said to have spent around $25 million on water trucks alone in that year, considerably exceeding its original budget planning. Water shortages continue to challenge Taiwan’s chip industry.
- Pandemics. The supply chain disruption in the semiconductor industry caused by the effects of COVID-19 is well-documented. Future pandemics and their potential disruption of the global semiconductor supply chain should not be ruled out.
Environmental risks can cause shortages, higher production expenses, and potential economic consequences for industries reliant on semiconductor technology. In response, the sector must employ resilience and contingency strategies to counter such risks.
Economic risks. Demand spikes, supply gluts, and other economic disruptors affect supply chains, induce market imbalances, and strain production capacities. Examples include:
- Surge in semiconductor demand. In 2023, the global semiconductor supply-demand gap was projected to stand at 9%.[1] Closing this gap presents a significant challenge, particularly for the European automotive sector, which is forecast to experience the highest growth (11% CAGR) among all semiconductor segments until 2026. In contrast, consumer electronics is expected to grow by 4%, while smartphone growth is anticipated at just 2%.
- Effects of demand shocks. Europe has been profoundly affected by the semiconductor shortage, with vehicle production falling by 2.3 million units in 2021, constituting 24% of global losses, making it one of the most impacted regions alongside North America, which accounted for 25% of losses.[2]
Overall, abrupt demand surges and fluctuations can catch businesses unprepared, possibly leading to supply shortages and difficulties in meeting consumer demands. Conversely, supply gluts are also possible, as seen in some semiconductor categories (e.g., with memory chips in the second half of 2023). Consequently, businesses face challenges in swiftly scaling up production, affecting their capacity to benefit from growth and fulfill orders, or reducing production and inventories in times of economic slowdown. The economic risk resides in the potential for these disruptions to trigger market instability and create broader economic imbalances.
Technological risks. Risks such as cyberattacks and ransomware attacks, impact the integrity of semiconductor products, operational efficiency, and consumer confidence. Recent examples include:
- Cyberattacks. In 2023, Applied Materials, a leading global supplier of semiconductor manufacturing equipment, services, and software, experienced a decline in sales due to a cybersecurity attack on one of its suppliers, MKS Instruments. The attack resulted in a loss of $250 million in sales. The consequences of this attack extend to disrupted order processing, product shipments, and customer service. Such supply chain attacks exploit vulnerabilities within a company by targeting less secure elements like vendors.
- Ransomware attacks. The semiconductor industry faced eight ransomware attacks from extortion groups in 2022. Prominent companies, such as NVIDIA, AMD, and Samsung, along with others, including Ignitarium, Diodes, SilTerra Malaysia Sdn. Bhd., Semikron, and Etron Technology were targeted. Ransomware groups perceive semiconductor firms as high-value targets and utilize media attention to coerce victims into ransom negotiations due to the sector’s critical role in the global economy. These groups employ malware to encrypt data, issue extortion threats, and even publish proprietary information like source code. Some threaten to sell stolen company data and plans to competitors or rival nations.
Given the interconnected nature of the industry and its pervasive applications, robust cybersecurity measures are imperative to mitigate risks and sustain the stability and expansion of the semiconductor sector.
Geopolitical risks. As semiconductors are crucial components in various technologies, including defense systems, communications, and consumer electronics, their availability and access can become contentious issues with geopolitical implications. Therefore, as economies compete to take the lead in the semiconductor industry, geopolitical risks must be considered. Risks stem from trade tensions and restrictions imposed by nations, potentially disrupting supply chains, restricting access to key markets, and affecting the global movement of materials and products. Geopolitical risks include:
- Trade disputes. Trade between the US and China significantly influences the global semiconductor industry and its supply chain. The US-China trade dispute’s repercussions extend to various economies and companies within the sector. The stringent export controls imposed by the US, aimed at impeding China’s chipmaking progress, create formidable challenges for the Chinese semiconductor industry. These regulations restrict the export of chipmaking equipment and curtail the utilization of US-made tools for Chinese industries and customers. As a result, companies like Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies encounter limitations on equipment procurement and support from their previous US and European suppliers, leading to a noticeable downturn in China’s semiconductor industry.
- Respective security concerns of China and the US. In 2023, Japan and the Netherlands, following discussions with the US, agreed to restrict the export of advanced chip manufacturing equipment to China. This move supports the US’s strategy to limit China’s access to advanced technologies, especially in semiconductors. In response, China implemented export restrictions on key materials (gallium and germanium) crucial for various technical applications, including semiconductors. China justified these actions as safeguards to its security, and they involved a government-controlled licensing system, posing challenges for Western companies that rely on these materials. Consequently, the global supply chain is witnessing price hikes due to this geopolitical maneuvering. Additionally, China withheld regulatory approval for a $5.4 billion acquisition of an Israeli chip manufacturer by Intel, a response occurring amid escalating tensions between the US and China. The terminated deal reflects the broader context of the US imposing export controls and restrictions to dampen China’s access to advanced chip capabilities.
- Competition over advanced semiconductors. Other economies are ensnared as well as a result of the trade dispute and geopolitical tensions. An example lies in the geographical semiconductor concentration in Taiwan, whic
  - By Arthur D. Little
  - 24/06/2024
  - semiconductor industry
  Fuente: Arthur D. Little
  https://www.adlittle.com/en/insights/report/localizing-global-semiconductor-value-chain