For decades, semiconductor evolution steadily followed Moore’s Law in terms of performance and cost, while design and manufacture became woven into a worldwide network with stratospheric levels of investment and expertise.
In the last couple of years, this cosy arrangement has been disrupted by the pandemic, resulting in chip shortages and mismatch between demand and supply. Although the sector is recovering from this temporary setback, there are other clouds on the horizon.
A brief history of semiconductors and microchips
The first semiconductors, invented in the U.S. in 1947, were transistors made of silicon. “Before that,” explains the BBC, “the mechanics of computing had been performed by vacuum tubes, which were slow and bulky.” But building transistors out of silicon enabled semiconductors to fit on a microchip.
Decades later, this breakthrough led to the miniature computers we carry in our pockets, allowing devices to “to become smaller and smarter by the year.”
Taiwan takes all
Moore’s Law — the observation that the number of transistors on a microchip doubles every two years while cost is halved — went on to govern the state of the growing microchip industry. But as performance increased and cost fell, other markets joined the U.S. in manufacturing microchips.
Japan and China were early competitors, but Taiwan soon emerged as chipmaker to the world, and is now responsible for producing 90% of the world’s premium logic chips, according to The Economist. Today, Taiwanese Semiconductor Manufacturing Company (TSMC) “is the biggest chipmaker in the world by market value,” and, along with South Korea’s Samsung, is the only manufacturer with the know-how to produce the world’s most sophisticated chips.
Global chip shortage
One of the first effects of the COVID-19 lockdown was a chip shortage as growing demand for semiconductors in the automotive sector combined with the need for technology that enables work-from-home setups. As J.P. Morgan Research explains, automakers found themselves in competition for the semiconductors coming out of Asian manufacturers. Combine that with workforce issues created by the virus itself, and you have a perfect storm.
An unhealthy dependency
Though recent reports suggest the global chip shortage is is being resolved, it has focused attention on the world's unhealthy dependency on a single country of supply in a region subject to geopolitical tensions. The reaction by consumer nations has been massive investments in a belated attempt to establish semiconductor self-sufficiency.
How consumer nations are trying to build microchip autonomy
Several countries have mobilized to advance their microchip autonomy. The Financial Times reports, “China, the US, the EU, Japan and India have collectively promised $190bn in subsidies over a decade.”
In August 2022, the U.S. government passed the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act). According to McKinsey, the CHIPS Act “aims to catalyze investments in domestic semiconductor manufacturing capacity. It also seeks to jump-start R&D and commercialization of leading-edge technologies, such as quantum computing, AI, clean energy, and nanotechnology, and create new regional high-tech hubs and a bigger, more inclusive science, technology, engineering, and math (STEM) workforce.” Additionally, the CHIPS Act allocates $280 billion over the next ten years to scientific research and the U.S. Department of Commerce “will oversee $50 billion in investments to expand domestic manufacturing of mature and advanced semiconductors.”
Europe also passed the EU Chips Act in August 2022, which Brookings reports, “provides billions in financial support to set up factories for advanced chip production” and “step up semiconductor research in the EU.”
No quick fix
In spite of the major commitment of resources, duplicating the technical expertise and facilities of the Taiwan chipmakers will be neither cheap nor easy.
A state of the art chipmaking plant (known as a 'fab') now costs around $20bn to build and requires sophisticated machinery available from a small number of manufacturers (mainly in the Netherlands). Getting such a plant on stream usually takes several years and highly specialized engineering know-how (likened to a skilled 'craft' ).
Most commentators agree that the efforts by the large consumer nations to replace Taiwan as a source of high-end microchips are unlikely to show significant results before the end of the decade.
The short-term outlook
As countries continue their efforts to bolster microchip autonomy, the global semiconductor market is poised to change. Tech Design identifies three semiconductor trends expected to define 2023:
- Consumer electronics on the decline — “The sluggish demand for consumer electronics, including smartphones, PCs, and tablets, has brought a downturn in the semiconductor industry,” reports Tech Design. The PC and tablet market is expected to decline 2.6% while the smartphone market, “although far from the 24.5% growth rate in 2021, is forecast to remain positive at 5.2% in 2023.”
- Automotive microchips spur positive growth — The automotive chip market is expected to “grow from USD 42 billion in 2021 to USD 125 billion in 2030, at a high CAGR of 13%.” Additionally, “the demand for automotive chips with advanced processes is growing at a CAGR of 24% in the coming ten years, as solid computing power is needed for advanced functions such as self-driving, ADAS, and real-time road monitoring.”
- US-China tensions negatively affect the semiconductor industry — “As the most prominent tech giants in the semiconductor industry, US and China refuse to give way to each other, and companies are forced to choose either side for cooperation. The deglobalization inevitably impacts industry efficiency. This war will persist in 2023, and all the participants in this industry will be severely affected.”
In the short-term then, barring serious geopolitical developments (not to be ruled out completely as 2022 has shown) the world's existing chip sources, while precarious, will probably satisfy demand. In the longer term the diversification of supply for advanced semiconductors will bring welcome security to global markets, as well as competitive pressures that may be a useful source of innovation.