The Semiconductor War

One of the virtues of blogging is that it affords the opportunity to opine on topics one knows nothing about. And yet, one understands that many of you are far more knowledgeable than I about topics like semiconductor manufacturing. And one also understands that the world economy today does not just run on energy resources-- where the Biden administration has been shooting itself in the head-- but on the availability of semiconductors.

One has read in the press, because one does read some of what is in the press, that we are now going to onshore semiconductor manufacturing, along with the other important tech production. Congress just passed a bill to ramp up semiconductor manufacturing in America.

As it happens, this cannot be done. It is a lie that has been promulgated in order to keep people ignorant about what is going on in the world.

Government officials have recognized that we cannot onshore it all, so they now talk about friendshoring. Given the complexity of the materials and the expertise required to produce today’s chips, it is unrealistic to imagine that we or anyone can go it alone. So, we want to rely on countries that are friendly to us. 

This too is likely to be a pipe dream, but a country can dream, can’t it.

Anyway, I will present herewith excerpts from an article in Nikkei Asia, reprinted by the Financial Times. 

The theory underlying the article is quite simple, and quite Adam Smith. So many different companies and countries contribute to the manufacture of semiconductors that it cannot happen under a mercantilist regime. It is all about free trade.

So, here is the story from Taiwan Semiconductor, the world leader in manufacturing of high end chips:

TSMC is in the midst of a $100bn expansion, spurred on by governments in the wake of last year’s alarming shortages of crucial chips. But the Taiwanese giant has found its own supply chains to be plagued by bottlenecks, affecting items that range from lenses so precise they could focus a laser beam on a pingpong ball on the moon, to apparently mundane valves and tubes.

The machines that TSMC ordered from the United States are simply not being shipped:

The June mission followed on the heels of a similar trip by the company’s supply chain management chief, JK Lin, and a task force to the US in March, to investigate why the chipmaking machines TSMC ordered there were taking up to 18 months to turn up.

Japanese companies are not doing much better:

In Japan, suppliers including Tokyo Electron, the country’s largest chipmaking equipment manufacturer, and Screen Semiconductor Solutions told TSMC they might miss even the elongated delivery times they have promised, sources familiar with the tricky meetings told Nikkei Asia. Screen — one of the few companies in the world making the chemical cleaning machines that are vital in chipmaking plants — reeled off a list of obscure components that it was having trouble securing from its own supply chain. Valves, tubes, pumps and containers made of special plastics — all are in short supply.

So, we arrive at an inconvenient truth. Trade tensions between America and China are proving to be very, very costly. Adding this to the Ukraine war and the pandemic has produced the current slowdown:

The difficulties underscore a series of inconvenient truths, not just for TSMC and its rivals and suppliers, but for policymakers around the world. Amid US-China trade tensions and pandemic disruptions, governments in China, the US, Europe and elsewhere have determined to “onshore” semiconductor manufacturing. So-called supply chain resilience has become a central aim of policy. But such resilience is a myth. 

The therapy world is awash in talk about resilience, about the ability of the mind to heal itself. Yet, the notion that we are going to replace free trade with mercantilist policy is a myth. It makes us feel good, but it does not come close to addressing the problem:

These new national efforts are backed by huge subsidies and state-backed investments. The US Senate at the end of July approved the $52bn CHIPS Act. Japan’s government will back TSMC to the tune of ¥476bn ($3.5bn) to build a factory there for the first time. 

The trouble is these efforts touch only the visible end of the semiconductor supply chain. Behind chip production sits a network supplying equipment and other items encompassing hundreds of raw materials, chemicals, consumable parts, gases and metals without which the bogglingly precise process of chipmaking could not function. China is directing a combined Rmb1.5tn ($221bn) of public and private investments to replicate a chip supply chain within its own borders, with modest results to date.

Again, semiconductor manufacturing has been a triumph for free trade:

While a globalised semiconductor industry used to run smoothly across dozens of countries, the effort to replicate this architecture inside single countries or regions has revealed and exacerbated bottlenecks in the supply chain, according to Nikkei Asia’s investigations and interviews with more than two dozen senior industry executives from the major chip economies of the US, EU, Taiwan and Japan over the past five months. At the same time, there are questions over the long-term wisdom of the policy, and fears about whether, if they can be gotten up and running, many of these factories might ultimately sit idle.

Among the problems are the source of materials-- not always in friendly countries-- and the ability to transport them:

“It’s not only the [factories] that manufacture the chips but it’s everything that goes in there,” said Jens Liebermann, vice-president of semiconductor materials at the electronic materials business unit of BASF, the German chemical group.

 “All the materials, chemicals, gases and their raw materials. All have to be there. It comes down to, where is the source, where is the raw material, where is the manufacturing, and who can handle the logistics?”

The former chairman of Taiwan Semiconductor was blunt:

Morris Chang, an elder statesman of the semiconductor industry who founded and formerly chaired TSMC, put it most bluntly in remarks addressed to the US.

“If you want to re-establish a complete semiconductor supply chain in the US, you will not find it as a possible task,” he said at an industry forum last year. “Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete, and you will find that it will be very high cost, much higher cost than what you currently have.”

The problem goes back to the Trump administration-- as I am sure you know but refuse to admit. The Trump trade war, coupled with sanctions and tariffs against China, damaged the supply chain and halted a large amount of chip manufacturing:

The call for chip supply chain resilience emerged amid the US-China tech war when former US president Donald Trump’s administration clamped down on Chinese tech champion Huawei Technologies in 2019 and blocked its use of American technologies, especially chips, citing national security. The drastic move spurred an aggressive nationwide Chinese campaign across sectors to cut dependence on the US and build a secure, self-controllable supply chain. 

The self-sufficiency movement evolved into a global campaign in late 2020, as unprecedented chip shortages stalled car production and hurt a wide range of industries, crimping global economic growth and threatening jobs. The US Department of Commerce said the shortages wiped an estimated $240bn off the country’s gross domestic product in 2021. The automobile industry alone made 7.7mn fewer cars than the year before.

There is almost no part of the chipmaking process that does not require deep specialisation and no part of the supply chain that can be simply and quickly duplicated.

The challenge of onshoring, even of friendshoring is daunting:

“If you want a resilient chip supply chain, you not only need chip plants, you also need a whole string of suppliers from critical chemicals and precision components all coming along,” said an executive at Japan’s Daikin. “Building a semiconductor plant takes several years, but building chemical plants will take even longer given the extensive environmental assessments and regulations for handling chemicals.”

So, the free trade that was producing unprecedented economic growth seems to have come to an end. This will continue until some of our leaders come to their senses:

Simon HH Wu, president of San Fu Chemical, a Taiwanese chipmaking chemical supplier, reckons geopolitical conflicts and trade barriers are prevailing over globalisation, upon which the chip industry was built. “It’s no longer an era of free trade,” he told Nikkei, warning that policymakers and the industry should be under no illusions about the difficulties ahead.

Consider yourself better informed.