The Crisis in Ukraine Spells More Trouble for Semiconductor Supply – MIT Sloan Management Review
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The crisis in Ukraine is the next tectonic disruption in an exhausting two-year span for the semiconductor industry — which was already significantly challenged by the COVID-19 pandemic and insufficient capacity to meet surging demand. This latest threat to semiconductor production may be the most significant yet: It is poised to send shockwaves rippling through a range of manufacturing sectors, including high tech, automotive, consumer electronics, and household appliances.
The root of the issue is that Ukraine is a prime supplier of neon gas — which is required to operate the lasers used in the lithography phase, the heart of semiconductor fabrication. Without neon, chip production comes to an abrupt halt. The U.S. has historically sourced as much as 90% of the required semiconductor neon from Ukraine, which has also provided about 70% of the global supply. Ukraine is also a major supplier of xenon and krypton gases, also critical to chip manufacturing.
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The concentration of these strategically essential gases in Ukraine is an accident of manufacturing history. Neon gas is a byproduct of steel production, specifically from older steel mills that today are largely located in eastern Ukraine. The former Soviet Union (which included today’s Ukraine) had many of these large steel mills, which were outfitted with air separation equipment to capture rare waste gases, including neon, krypton, and xenon, for use in experimental high-powered laser weapons, missiles, and satellites. After the dissolution of the USSR in 1991, these older steel facilities were largely replaced with new infrastructure that had no gas-collection technology because the economics did not support it. In contrast, by continuing to operate old-style steel mills, Ukraine became the dominant supplier of these gases that are vital to the global semiconductor industry.
Russia’s aggression in Ukraine has also exposed several related vulnerabilities to semiconductor supply beyond these gases. Russia today holds 40% of the palladium market, 15% of titanium, 12% of platinum, and 10% of copper, all of which are vital inputs for high-tech products — such as catalytic converters, turbine engines, ion batteries, and circuit boards — and for plating processes in chip manufacturing. The sanctions imposed by the G7 and other nations, fueled by the world’s condemnation of the Ukraine invasion, make Russia a dubious source for such supplies for the foreseeable future.
Per K. Hong (@per_hong) is a long-time Kearney partner and a core member of the firm’s strategic operations practice. Erik Peterson is a Kearney partner and managing director of the firm’s Global Business Policy Council. Bharat Kapoor (@bharatkapoorchi) is a partner and global lead at Kearney. Drew DeLong (@drewtdelong) is a consultant at Kearney.
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