A vital industry hits perilous waters as tensions rise


Louise Cresswell discusses the state of the semiconductor industry in 2023

Article Image

Image by IISG

By Louise Cresswell

It is no secret that industry is still feeling the ripples of the Covid-19 pandemic, but nowhere is this more salient than in the market for advanced semiconductors.

Semiconductors are necessary components in producing the majority of appliances, cars, and electronics, and over the course of the pandemic, semiconductor plants – most of which are located in South Korea and Taiwan – were forced to close over concerns about the spread of Coronavirus among employees. At the same time, global demand for electronics shot up as additional home appliances were required for those working from home. This already difficult supply constriction, concurrent  with a boom in demand, was worsened by draughts in Taiwan limiting the supply of the ultrapure water necessary for semiconductor production. In light of ever-heightening tensions between China and Taiwan, a race toward manufacturing self-sufficiency within Europe, and unprecedented industry-intervening legislation from the Biden administration, what appears on the surface to be a rather dry topic has evolved. The semiconductor crisis underpins a new era of hostile geopolitics and backlash to the previously sacrosanct concept of ‘new growth theory’ that professes the feasibility of endless economic expansion.

China and Taiwan have been in dispute over Taiwan’s legitimacy as a sovereign state since the end of World War Two, but tensions reached new highs after Nancy Pelosi, Speaker of the US House of Representatives, visited Taiwan in August of 2022. In response to what the Chinese government viewed as a de-facto legitimisation of sovereign Taiwan on the part of the US, China has flown missiles over the island, as well as repeatedly sailing ships around the coastline. If, in the coming year, China’s war games progress to a full invasion of Taiwan, this will have huge implications on the global ability to produce electronic goods. It is estimated that US GDP could be cut by approximately 5-10 percent due to the further restrictions in semiconductor circulation that a Chinese invasion of Taiwan would incur, before even considering the huge economic ramifications of a global conflict that the US and much of Western Europe have agreed they’d be compelled to involve themselves in.

China themselves are not exempt from the consequences of a semiconductor fallout, having not developed enough of their own infrastructure to rival Taiwan’s ability to produce advanced semiconductors, and are now investing heavily in the electronics industry with hopes of amending this precarious position. An array of nations have also rushed to build semiconductor fabrication plants, capitalising on the opportunity to take over the semiconductor market that any conflict between Taiwan and China would present. In Europe, Germany has invested more than 3 billion Euros into the country’s electronics sector, focusing on semiconductor production. German Chancellor Olaf Scholz professes this is a crucial step in achieving self-sufficiency for the European Union, and pivotal to preventing foreign conflicts from destabilising the European economy. This target has risen rapidly up the agenda in light of the fallout from the Russian gas crisis. In contrast, the British government waited two years to publish its semiconductor strategy, which critics have argued has been rather lacklustre in its vision for transforming the UK’s position in the industry. The UK’s involvement in semiconductor production is currently focused on designing new technologies, which does not offer either the profit potential or business certainty that end-to-end manufacturing would. However, ministers have recently been working to repatriate semiconductor facilities in Wales that were owned by Chinese companies.

The US still stands as the country best positioned to disrupt the semiconductor market. Incumbent President Joe Biden closely followed the CHIPS Act in August of last year – which funnelled 52 billion USD solely into semiconductor production – with the Inflation Reduction Act that committed to channelling 738 billion USD into clean energy projects that depend heavily on continuous semiconductor availability, particularly where electric vehicles are concerned. The US political establishment maintains that alleviating the semiconductor shortage is inextricable from tackling inflation.

In understanding the current political landscape, it seems likely that 2023 will be the year that the semiconductor shortage comes to a head. Some countries will emerge from this crisis not only richer, but in stronger geopolitical positions than before, while others will reap the consequences of a missed investment opportunity: a fate that industry leaders have suggested may befall the UK if Rishi Sunak does not act soon. What is particularly clear from this situation is its similarity to the European gas crisis, not only in highlighting our collective failure to future-proof ourselves from relatively predictable supply constrictions, but in a transnational reluctance to think of climate-friendly solutions to our economic plights. The semiconductor crisis presented us with a unique opportunity to seriously build toward a circular economy, in which our new devices are constructed with components from yesteryear, and offered a different route to decarbonising transport, not by merely buying a brand new electric vehicle, but by opting in favour of our stagnant second-hand car industry. 2022 saw the unrecycled e-waste on earth surpass 347 million metric tonnes. Only time will tell if the current semiconductor crisis could pale in comparison to the consequences of landfills full of nonbiodegradable electronic waste.