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The world is headed for a digital-first economy, with new industries such as the metaverse, artificial intelligence and digital currencies taking precedence in the global digital transformation. However, the integral component that will power these emerging technologies — the semiconductor or chip, which is central to all things electronic — faces a turbulent production environment. Sometimes even referred to as the “petroleum of the 21st century,” the semiconductor industry is concentrated mainly in Asia (about 72% in 2022), primarily mainland China, Taiwan and South Korea. And these countries are prone to unexpected geopolitical unrest given their current political standings.

Both the US and Europe aim to boost domestic and regional semiconductor manufacturing significantly, threatening to rebalance global semiconductor manufacturing away from Asia-Pacific economies. The US and EU have planned to invest around $100 billion combined to become more self-sufficient in semiconductor production, albeit a process that could easily take years to materialize.

Leading US chip maker Intel’s chief Patrick Gelsinger admitted during the last World Economic Forum in January that letting Asia take the lead in the semiconductor industry was a mistake and said that fixing it will take decades.

“We needed a global crisis (read coronavirus pandemic) to realize we had allowed ourselves to become dependent on single points of failure in the supply chain. We need resilient supply chains for the future,” he told the audience at Davos.

The European Union recently raised the alarm to ramp up the production of semiconductors given the unpredictable geopolitical situation in chip-making factories in Asia. The EU is already investing heavily, intending to double the bloc's semiconductor global market share to 20% by 2030.

Lessons From the Pandemic

The global ICT industry will never forget the short supply of chips experienced during the coronavirus pandemic years between 2020 and 2022. Several reasons resulted in the scarcity of chip production: firstly, as a result of the lockdowns during the pandemic, demands from the consumer electronics industry shot up as people worked from home and engaged in online activities. Secondly, the US sanctions against Chinese technology companies added to the semiconductor shortage woes, and thirdly, Taiwan, the world’s biggest supplier of computer chips — the Taiwan Semiconductor Manufacturing Company (TSMC) — experienced major drought conditions, which are highly unfavorable for the chip production process as it requires heavy use of water. The dried-up reservoirs were a major detriment to the industry.

It Needs Time

Although investing in building new chip facilities seems like a logical alternative — one that ensures self-sufficiency — in practicality, it is not as easy as it sounds. Typical semiconductor factories have limited capacity, and building new factories takes massive investment and often several years. They have to be built in factories with ultra-controlled environments, called “fabs.” Dust particles, temperature fluctuations and even static electricity can damage the complex workings of semiconductors. According to analysts, currently, fabs are running at full capacity, and it will take months or years before new ones come online to fill the extra demand.

Taming Supply and Demand

A 2022 report from the US Department of Commerce showed that “semiconductor fabs operated at over 90% utilization.” Companies are racing to make the capital investments necessary to increase production. Demand will remain sustained for a long time as consumers continue to seek the requisite hardware that uses semiconductors to process the massive amounts of data needed to bring the metaverse to life. According to Statista, semiconductor revenue globally is expected to show an annual growth rate (CAGR 2023-2027) of 8.09%, resulting in a market volume of $818.6 billion by 2027. Compared globally, most revenue will be generated in China ($217.10 billion in 2023 alone).

Recent semiconductor shortages have highlighted the sector's reliance on effective functionality within global supply chains, including those in the Asia-Pacific region. However, in recent developments, to further strengthen their competitive prowess over China, US senators are planning stronger legislation to tackle issues related to technology and even security concerning Taiwan.

As such, semiconductor manufacturing has been in the eye of the storm between the US and China, with Washington restricting the supplies of advanced chips or other supplies to the Asian nation, further threatening the sector. Although China is also a leading supplier and refiner of metals and rare earth materials needed for manufacturing semiconductors, the probability is that China will continue to invest in supply chains, bypassing US sanctions, and continue the production of its chips. Also, since China is a strong trading partner of key semiconductor producers in the Asia Pacific, it could threaten economic retaliation against countries that support US efforts to restrict mainland China's technological development. Taiwan’s TSMC operates the world's largest silicon wafer factories and produces some of the most advanced microchips used in everything from smartphones and cars to missiles.

"If, God forbid, China all of a sudden attacked Taiwan, about three-quarters of the world's chip supply could stop," an analyst told AFP.

The chip industry is responsible for the functioning of diverse sectors, from defense to household appliances, and it is known for its supply chain volatility with the ups and downs of the world economy. For example, chip makers are currently facing losses as shipments of smartphones and personal computers are witnessing a decline given the rise in costs of these devices as a result of high inflation.

With the current high inflation-ridden global economy and strong competition growing between these world giants, it will be interesting to see if the chips coming to the market will ignite a digital revolution or choke us all with a deluge of wafers.

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