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The World’s Most Vulnerable Supply Chain

By February 27, 2023Uncategorized

Chip War: The Fight for the World’s Most Critical Technology won the Financial Time’s business book of the year award. Economic historian Chris Miller, a professor at Tufts, recounts the story of the ongoing battle for semiconductor supremacy. It also provides a good explanation for why the semiconductor supply chain is the world’s most vulnerable supply chain.

Semiconductors go not into just computers and smart phones, but all manner of cars, trucks, and planes. These are embedded in industrial machinery, home goods (like refrigerators), toys, and advanced military devices. “We rarely think about chips,” Mr. Miller avers, “yet they’ve created the modern world. The fate of nations has turned on their ability to harness computer power.” As just one example of the criticality of semiconductors, China spends more money on importing semiconductors than oil.

Risks Are Centered in Taiwan

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chip manufacturer, and it is responsible for supplying semiconductors to most of the world’s largest technology firms. It produces the world’s most sophisticated chips. While Apple designs the most advanced chips for their smartphones, only TSMC can manufacture them. These chips are currently manufactured at a single site in Taiwan.

A semiconductor is a grid of millions, even billions, of transistors on a chip that has a diameter of 25 to 300 centimeters. TSMC can etch shapes into their chips that are smaller than a virus. It is a sophisticated manufacturing process that supports this incredible miniaturization. In short, it is manufacturing prowess that puts advanced foundries at the heart of the semiconductor supply chain. “Fabricating and miniaturizing semiconductors has been the greatest engineering challenge of our time,” Professor Miller asserts.

Based on the deteriorating relations between China and the US, this is a problem. China considers Taiwan a province of greater China. They refuse to say they will not invade this independent nation. But even if an invasion did not occur, a single missile that targeted TSMC’s plant, or a sophisticated cyber-attack, would disrupt global supply chains.

Further, production in Taiwan can be disrupted by typhoons and earthquakes. Geologically and metrologically, Taiwan is not an ideal site for such important manufacturing sites. But then neither is Japan, Malaysia, or Silicon Valley, where other key sites in the global chip supply chain are based.

China remains infuriated about the US’s actions against their homegrown tech company, Huawei. Huawei is a leading global provider of information and communications technology infrastructure and smart devices. “The U.S. feared that Huawei’s products were now priced so attractively,” Mr. Miller wrote, “partly owing to Chinese government subsidies, that they’d shortly form the backbone of next-generation telecom networks. America’s dominance of the world’s tech infrastructure would be undermined. China’s geopolitical clout would grow.”

“To counter this threat, the U.S. barred Huawei from buying advanced computer chips made with U.S. technology. Soon, the company’s global expansion ground to a hold. Entire product lines became impossible to produce. Revenue slumped. Huawei discovered that, like all other Chinese companies, it was fatally dependent on foreigners to make the chips upon which all modern electronics depend.”

America was able to thwart Huawei because the semiconductor industry grew up in Silicon Valley. “Almost every chip made still has a Silicon Valley connection or is produced with tools designed and built in California” according to Professor Miller.

The recent news about Chinese spy balloons, and the reaction of Congress, show that relations with China are getting worse, not better.

The Global Semiconductor Supply Chain

While Taiwan is where military strategists are focusing their attention. The semiconductor industry is a global supply chain.

“A typical chip might be designed with blueprint prints from the Japanese-owned UK-based company called ARM,” Professor Miller explains, “by a team of engineers in California and Israel, using design software from the United States. When the design is complete, it’s sent to a facility in Taiwan which buys ultra-pure silicon wafers and specialized gases from Japan. The design is carved into silicon using some of the world’s most precise machinery, which can etch, deposit, and measure layers of materials a few atoms thick. These tools are produced primarily by five companies one Dutch, one Japanese, and three Californian, without which advanced chips are basically impossible to make. Then the chip is packaged and tested, often in Southeast Asia, before being sent to China for assembly into a phone or computer.”

“No other facet of the (global) economy is so dependent on so few firms. Chips from Taiwan provide 37% of the world’s new computing power each year. Two Korean companies produce 44% of the world’s memory chips. The Dutch company ASML builds 100% of the world’s extreme ultraviolet lithography machines, without which cutting-edge chips are simple impossible to make. OPEC’s 40% share of world oil production looks unimpressive by comparison.”

If any one of these links is disrupted, so are global supply chains. “Unlike oil, which can be bought from many countries, our production of computing power depends fundamentally on a series of choke points.”

The US is Committed to Building Redundancy

In August of last year, the CHIPS and Science Act was signed into law by President Biden on August 9. The act provides $280 billion in new funding to boost domestic research and manufacturing of semiconductors in the United States. Considering the magnitude of these subsidies, it is not surprising we have seen investment by semiconductor firms.

TSMC is spending $40 billion to build two fabs in Arizona. The first fab will start producing 4-nanometer chips in 2024. The second plant will follow with smaller, and thus even more advanced three-nanometer chips starting in 2026. Supply chain executives can only hope that these plants are finished on schedule and that a confrontation does not occur before these plants come online. Given the difficulty construction firms are having hiring and retaining workers, maintaining the scheduled openings will be a challenge.

Building chip redundancy is a wonderful thing for global supply chains – at least for those based in the West. But we are in for several tense years before those critical new fabs come online. Unfortunately, the semiconductor chain, the world’s most vulnerable supply chain, impacts all supply chains.

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