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Chip shortage to worsen to due to war, supply chain crisis

Semiconductor chips are ubiquitous and in short supply. Some nations have decided that they are a part of their national security and economic security. The current squeeze in chip supply has led to the proposed Chips for America Act, European Chips Act, China’s subsidies for chip manufacture and India’s recently announced incentive schemes for semiconductor manufacture.

In addition to the supply squeeze, another prominent factor impacting the industry is geopolitics. Strained relations between countries could impact the supply of these goods which apart from being components of computers, electronics, and other consumer goods could also be components of military equipment. These factors lie behind the effort by some countries to secure the supply chain for products of the semiconductor industry.

Semiconductor industry
The industry itself consists of multiple sub-sectors. While the number of branches could be numerous, the industry can broadly be divided into three product categories, processors/controllers, memory and & other products. The first category includes processors, chips used in modems, routers and controllers for consumer and industrial machinery. This category is dominated by the largest corporations in the semiconductor market. The second category of memory products is served by some of the large companies that make processors as well but there are also a few large companies that specialize mainly in memory products. The third category of products includes semiconductors used in sensors, communication devices, power management etc. The third category of products is manufactured by a larger number of smaller companies spread across industrialized countries.

Leading manufacturing regions
Let us look at the current global distribution of the semiconductor value chain. As of 2021-22, Taiwan, South Korea and China supply the largest amount of semiconductor products, followed by US and Japan at the next rung, with EU at a lower level followed by other smaller players. Two decades ago the picture was different with USA, EU and Taiwan having the largest share in semiconductor manufacture.

Geographical spread of the value chain
The overall manufacturing supply chain of semiconductors is rather complex with intellectual property originating in a few regions, capital goods such as equipment for deposition, lithography, and other processes, manufactured by companies in very few countries and fabs (facilities for manufacturing semiconductors, which require huge capital investment) located primarily in East Asia, China, Taiwan, and US. There is no country that can be said to be self-sufficient in the semiconductor value chain which is dispersed across a few locations. This dispersal has emerged due to the requirement of huge investments in research and development, design, and manufacturing. At the same time, it is pertinent to note that the value chain spans only a handful of countries.

Attracting investment
While it is neither possible nor advisable for the value chain to be present in most countries, the squeeze in supplies and perceptions of economic and physical security are prompting some countries to invest in attracting as many components of the value chain to their territories as possible. This is the context in which the US, China, EU, and Indian initiatives for attracting investment in semiconductor manufacturing have arisen.

An old trick from the book of trade could have been the raising of protective tariffs so that a sheltered market is provided to manufacturers in a country. However, most governments cannot easily raise tariff barriers on semiconductor products, being bound by commitments under the Information Technology Agreement (ITA), a plurilateral agreement under the aegis of WTO. Notwithstanding the commitments under ITA, in the past a few governments have indeed imposed duties on some information technology products by interpreting the ITA in the light of technological changes.

In addition to tariffs, technical requirements notifiable under the Technical Barriers to Trade (TBT) agreement of WTO could be deployed in order to nudge semiconductor fabricators to spread their footprint across countries. Whether this does happen in future remains to be seen. As mentioned earlier, some governments are turning towards providing financial incentives for setting up research and development, design, manufacturing, assembly, testing and packaging facilities in their jurisdictions. Such financial support is meant to change the economics favourably towards setting up new operations or expanding existing operations in relevant countries. In addition to these incentives, there could also exist certain opportunities in fiscal systems of countries which when coupled with incentive regimes could become attractive propositions. Yet another factor to be kept in mind is the export control regime of the host nation.

Factoring in geopolitics and trade
There is little doubt that geopolitical developments and national and regional priorities of large markets will shape future value chains. Such factors will need to be viewed in conjunction with the economics of supply chains and availability of skilled manpower while taking decisions on locating manufacturing, research, or design facilities. Since the investments involved for the semiconductor sector will be huge in financial terms, corporate entities will need assurance of long-term policy certainty from governments. Such policy certainty would need to cover national regulations, export controls, import tariffs, non-tariff, or technical barriers to trade, financial incentives and taxation.

As this situation plays out, we may see a geographical dispersal of semiconductor manufacturing that is significantly different from today. A new order could result from corporations’ reading of the geopolitical and trade trends, cost-benefit assessments and negotiations between corporate entities and national/regional trading blocks. Pehal News

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