Monday, August 8, 2022

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.

3 comments:

  1. Yes, some of the Trump trade policies had negative outcomes, as you have plainly outlined here. No reasonable person would deny this. Meanwhile, Biden allies cannot bring themselves to utter the word “recession.” It would seem all politicians err — it appears we just can’t count on them to admit it.

    That said, the favor that Trump’s trade moves did for all of us — whether intentionally or inadvertently — was to show our vulnerability to communist Chinese mercantilism and their voracious appetite for territorial expansion. Taiwan Semiconductor is a singular company with a lot of global economic power. Taiwan is in the sights of the communist Chinese for invasion. Even if the invasion went off flawlessly and with minimal bloodshed and/or property damage, the result would be a larger China with enormous economic leverage over the rest of the world. Going further, their client state North Korea might also threaten South Korea — where all the other semiconductors are made.

    This is apart from all the rare earth metals China has which are necessary for our chic fantasies about ubiquitous electric vehicles. The EV battery packs require these rare earth metals. We ain’t got ‘nuff of ‘em here in the food ol’ US of A…

    While trade is critical for human civilization — indeed, many believe trade is THE critical component of homo sapiens’ global adaptation and expansion — you cannot have reliable lines of trade with bad actors. The mercantilist posture of the communist Chinese is a threat to global trade economics.

    America has accomplished amazing things in the face of all kinds of historical threats. Today’s semiconductors are amazingly complex to provision and produce. But if China faces similar or comparable threats of breakdowns in global trade, then we have some leverage and should look after our own interests. If somewhere in our nation we still have the Apollo program mindset, we can produce semiconductors. Otherwise, we should henceforth content ourselves with being China’s bitch.

    I am NOT saying we have to go it alone. After all, trade comes from the reality that self-sufficiency is a myth. But we should be partnering with nations that share our values. China does not. We should stop trying to pretend they do.

    And we should stop engaging in the labor arbitrage that continues to send our manufacturing capacity overseas.

    And we should stop pursuing technocratic totalitarianism here at home (think World Economic Forum), which in reality is the Chinese model with some American characteristics. There are alternatives to a command-and-control economy. There is opportunity and strength in de-centralized institutions and structures — while we still have them. That is our strength, it is definitely NOT China’s. Sadly, we seem to be moving toward one-size-fits-all — rule by a cognitive elite that can plan our lives out for us… for an exorbitant fee. I see little difference between the mindsets of the CCP and the Silicon Valley executive class.

    -IAC

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  2. China is a very big market for the Asian nations that supposedly share our values. If you imagine that they are going to turn off China, I have my doubts. I did not mention it, though I have done so before, but we do not have the human capital, the educated workforce that is capable of doing these jobs. And we do not have the materials that we need. The notion that it's a good idea to have a trade war with China, and to threaten them constantly, escapes me.

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  3. I agree, Stuart. Asia will not turn away from China. China has over a billion people. And you are correct, we as an individual nation do not have the human capital, which is why it is best that we amalgamate our talent with other like-minded nations.

    My point is that centralized control has brought China to this point. Same thing happened with the Soviet Union (1930-1960). But culturally, economically and politically, command-and-control can only get so far. When China opened up, it had a third world economy coming out of a scarring Cultural Revolution. Under Deng Xiaoping, they liberalized and accelerated their economic fortunes. But it only goes as far as the central planners can take it, as the control the commanding heights of the economy. That’s what a company like Foxconn is — the commanding heights.

    Yet doubling the size of the IRS and beating down the 1099 (gig) economy are not good paths to entrepreneurial success in the United States of America. And it’s really all we have left. The greatest support Trump has comes from small business owners and skilled middle class workers. If we give up on them, we’re doomed. That seems to be what the WEF and the Democrats want: technocratic socialism, without traditionally American characteristics.

    That’s all I’m trying to say. Decentralized power that harnesses creative genius and self-interest is our best way out. I believe China’s growth trajectory will top-out with centralized planning, and they have a lot of people to satisfy and mouths to feed.

    And as for Trump — and as I’ve said all along — the other choice in 2016 was Hillary Rodham Clinton. For me, the argument ends there.

    -IAC

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