Semiconductors, wafer-thin metal chips often smaller than a fingernail, are causing trade and geopolitical ripples around the world. The most recent semiconductor saga began with pandemic-induced disruptions in the global production and distribution of this critical input for a range of products, from smartphones to cars. It involved many of the top chip producers including the US, Japan, Taiwan, South Korea and China—the top producer of electronics and machinery, which has been scaling up chip-making capabilities over the past decade.

The semiconductor story has evolved greatly over the past two years. At the end of January 2022, manufacturers in the US had less than five days of chip inventory, but as demand for chips began to ease due to the economic slowdown, consumer demand for electronics waned. Global shipments of devices such as PCs, tablets and mobile phones shrank by 11.9% from 2021 levels, when purchases had surged to support remote working. [1]

This took the global semiconductor supply from a shortage to a glut. Samsung Electronics, one of the leading manufacturers of memory chips used in smartphones, reported a 22% fall in sales for the second quarter of 2023 and announced production cuts in April. Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker, forecasts a 10% fall in 2023 revenue. Overall, global semiconductor revenue is expected to decline by 11.2% in 2023, according to estimates from Gartner, a technology research and consulting firm. [2]

The recent disruption shows how reliant the world is on semiconductors, with production concentrated in limited regions. It prompted governments and corporations to examine how exposed they were to vulnerabilities in the semiconductor value chain. Consequently, this has driven action, including reshoring and export controls, which could shift the direction of semiconductor trade. In this article, we explore developments on these two fronts and their potential impact on trade routes.

Production patterns

The over-reliance on suppliers in geopolitical hotspots, such as Taiwan, has driven a wave of efforts towards reshoring. The most noteworthy and possibly advanced of these initiatives is the CHIPS and Science Act in the US, having spurred more than 50 investments valued at US$200bn, as of December 2022. [3] But this is not isolated to the US. The recently approved European Chips Act has incentivised firms to expand production on the continent. Semiconductor giants, TSMC and Intel, as well as smaller players such as Infineon, have made commitments to set up facilities in Germany. Japan is also forging ahead with plans to expand local production of semiconductors. This could result in increased domestic or regional sourcing of chips, reducing exports from established Asian sources such as Taiwan and South Korea. China has also offered more than 190 chip makers over US$1.75bn in subsidies to strengthen its self-reliance. [4]

Other countries have demonstrated ambitions in semiconductor production too. The Indian government recently reopened its US$10bn semiconductor subsidy programme, following a failed deal between Taiwanese producer Foxconn and India-based Vedanta. In June, Japan released a revamped strategy to expand production of advanced semiconductors. These markets will be attractive for companies aiming to diversify their supply chains away from China, although this is likely to take some time to materialise, but could potentially reroute trade within Asia. This diversification strategy has been the impetus for the US-proposed Chip 4 alliance, which includes Japan, South Korean and Taiwan, to create a more secure semiconductor supply chain.

Export controls

The geographic concentration in the production of raw materials has also been a key concern as the vast majority of germanium and gallium nitride, required for a limited amount of semiconductor production, is produced in China. In July, China introduced a licence system for the export of these two materials. However, market experts characterise this as more of a shot across the bow, than an effort to severely cripple global semiconductor production. So, the impact on trade volumes may be limited.

In response, other countries could increase production of these materials. For geranium these include Belgium, Canada, Germany, Japan, and Ukraine; and for gallium countries such as Japan, South Korea, Ukraine, Russia and Germany. [5] Although this could help to reduce reliance on China and shift supply chains, an expansion of mining could be delayed due to additional scrutiny of the environmental challenges it poses—particularly in Europe and Canada.

China’s export controls come in retaliation to restrictions from the US and its allies on exports of chips, lithography machines and chip-design software, citing national security risks with these chips used in military applications. [6] Although the US export controls explicitly target China, other countries are implementing more general measures. In June, the Dutch government announced national authorisation requirements for the export of specific advanced semiconductor manufacturing equipment, claiming that the policy is “country-neutral”. [7] Such policies can alter which companies gain access to manufacturing technology, impacting production levels and sources of supply for advanced chips in particular. However, these are likely to be quite limited as large-scale application would deny companies market access and result in a significant loss of revenue, which they would require to invest in further research and development.

Market outlook

There are already signs of a recovery in the semiconductor market. China, the world’s largest buyer of semiconductors, is experiencing an economic recovery—albeit a slow one. Gartner projects global semiconductor sales will grow by nearly 19% in 2024, following the decline in 2023.

This growth is likely to stem from the automotive and industrial sector, rather than the stagnating PC and tablet market. The automotive sector’s access to semiconductors has improved, following the acute shortage they faced amid the pandemic, when chips were diverted to consumer electronics. In the industrial sector, demand may be buoyed by the current boom in artificial intelligence, which will require high-end chips.

As the composition of demand evolves, so too will production and sourcing patterns, influenced by government incentives and controls. While there is no doubt that semiconductors will continue to have a global value chain, the key players and trade routes for this critical material look set to transform.

References:

[1] https://www.gartner.com/en/newsroom/press-releases/2023-01-31-gartner-forecasts-worldwide-device-shipments-to-decline-four-percent-in-2023
[2] https://www.gartner.com/en/newsroom/press-releases/2023-04-26-gartner-forecasts-worldwide-semiconductor-revenue-to-decline-11-percent-in-2023
[3] https://www.semiconductors.org/the-chips-act-has-already-sparked-200-billion-in-private-investments-for-u-s-semiconductor-production/
[4] https://www.scmp.com/tech/tech-war/article/3219697/china-gave-190-chip-firms-us175-billion-subsidies-2022-it-seeks-semiconductor-self-sufficiency
[5] https://www.cnbc.com/2023/07/04/what-are-gallium-and-germanium-china-curbs-exports-of-metals-for-tech.html
[6] https://www.technologyreview.com/2023/07/10/1076025/china-export-control-semiconductor-material/
[7] https://www.government.nl/latest/news/2023/06/30/government-publishes-additional-export-measures-for-advanced-semiconductor-manufacturing-equipment