When the chips are down: the semiconductor saga – Economist Impact
Melanie is a principal at Economist Impact. She has over ten years of experience delivering consulting and thought leadership projects to public, private and not-for-profit organisations. Based in Dubai, she leads the Middle East and Africa team on research across a range of sectors including food sustainability, recycling, renewable energy, fintech, trade and supply chains. She is a specialist in advanced recycling technologies and international trade. She is a seasoned moderator, having chaired numerous panel discussions and presented Economist Impact’s research at global in-person and virtual conferences.
Before joining The Economist Group, she was a senior analyst at MEED Insight, a research and consulting firm serving Middle East and North Africa. At MEED, she developed expertise in bespoke market studies and financial modelling across a range of sectors spanning construction, finance, power and water, oil and gas, and renewable energy. She held previous posts at the Office of the Chief Economist at the Dubai International Financial Centre and at the San Francisco Center for Economic Development. Melanie has an MSc in International Strategy and Economics from the University of St Andrews and a bachelor’s degree in business administration.
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
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Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
The GCC-LAC agricultural trading relationship has thus far been dominated by the GCC’s reliance on food imports, specifically meat, sugar, and cereals. Over the past two years, however, there has been a notable decline in the share of sugar imported from LAC, and 2017 saw the biggest importers in the GCC—Saudi Arabia and the UAE—impose a ban on Brazilian meat.
Market players on both sides of the aisle are keen to grow the relationship further, but there are hurdles to overcome. In this report, we explore in greater depth the challenges that agricultural exporters and importers in LAC and the GCC face. We consider both tariff and non-tariff barriers and assess key facets of the trading relationship including transport links, customs and certification, market information, and trade finance.
Key findings of the report:
GCC will need to continue to build partnerships to ensure a secure supply of food. Concerns over food security have meant that the GCC countries are exploring ways to produce more food locally. However, given the region’s climate and geology, food imports will remain an important component of the food supply. Strengthening partnerships with key partners such as those in LAC, from which it sourced 9% of its total agricultural imports in 2016, will be vital to food security in the region.
There is a wider range of products that the LAC countries can offer the GCC beyond meat, sugar and cereals. Providing more direct air links and driving efficiencies in shipping can reduce the time and cost of transporting food products. This will, in turn, create opportunities for LAC exporters to supply agricultural goods with a shorter shelf life or those that are currently too expensive to transport. Exporters cite examples such as berries and avocados.
The GCC can engage small and medium-sized producers that dominate the LAC agricultural sector by offering better trade financing options and connectivity. More direct air and sea links can reduce the cost of transporting food products, making it viable for smaller players to participate in agricultural trade. The existing trade financing options make it prohibitive for small and medium-sized players too. Exporters in LAC suggest that local governments and private companies in the GCC can offer distribution services with immediate payments to smaller suppliers at a discount.
Blockchain technology is poised to address key challenges market players face in agricultural trade. Through a combination of smart contracts and data captured through devices, blockchain technology can help to reduce paperwork, processing times and human error in import and export processes. It can improve transparency, as stakeholders can receive information on the state of goods and status of shipments in real time. Finally, it can help with food safety and quality management—monitoring humidity and temperature, for instance, along the supply chain can help to pinpoint batches that may be contaminated, minimising the need for a blanket ban on a product.
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