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The Finance of Chips and Semiconductors
Semiconductors and chips. You have seen the terms repeatedly on the news this year and would like to understand their effects on global markets and supply chains. This article will outline the importance of most industries' essential components at the origin of the currently observed supply-chain constraints, from gaming consoles to automobiles.
Taiwan Semiconductor Manufacturing Company (TSMC) is the world's leading chips producer. Companies specialise in different levels of chip manufacturing. While TSMC simply produces contracted chips, meaning the execution of production but without conducting research, the Dutch-based ASML conceives their products. The semiconductor market requires great levels of specialisation to offset immense research costs and high entry barriers. The 'European Chips Act' envisages developing continent-wide expertise in high-end semiconductors in order to secure specialised markets as well as providing other semiconductor firms, like TSMC, with essential materials and patents for lower-grade production [2]. The US Congress's $52 Billion 'Chips for America' subsidy further exemplifies the consideration attributed to this new challenge. Besides the commercial aspects of these components and their applications, we may recognise the geopolitical risks stemming from an ever-heightening competition with China to secure market domination. While CCP claims 70% manufacturing self-sufficiency by 2025, it has to this day only achieved 20% of independence [1]. Another high-potential company, Tsinghua Unigroup, has defaulted on obligations payback and faces bankruptcy. Trade controls from the USA also prevent China from developing high-end machinery, which will temporarily protect Occidental know-how and market share.
The consequences on supply-chains
While evident conflicts of power await global markets in the upcoming decades, consumer issues are already visible today. A similar shortage took place between 2008 and 2009 and like today, it all came down to demand. In the case of the 2021 semiconductor shortage, the pandemic has played a role in accelerating digital transformation, thus demand. Indeed, all vertical sectors increasingly rely on digitalisation. PC sales rose by 50% year over year in 2021 [3] while the number of cloud computing data centre chips sold increased by 30%. Due to ever-additional technologies implemented in cars, whether concerning connectivity or battery management, cars have almost doubled the number of microchips required for their manufacturing, forcing a reduced production, delayed deliveries and ultimately, a surge in second-hand market prices.
Deloitte has predicted specialised semiconductors sales to grow 50% annually to supply AI needs, notably for machine learning and inference. While our supply chains are almost perfect in their functioning, it means that they are frail. Any system requiring perfection can crumble when inefficiencies occur, as seen today. Consumers will suffer from resulting volatilities while economies will be impeded by unrealised profits. The dependence on micro-technical components enhances the need for developing robust semiconductor production. This contemporary challenge depends on governments' investment in the sector to prevent technical centralisation of production and innovation in particular geographies, not to say, Asia. Intel plans to build two mega-factories in Europe, which would prioritise the achieving of commercial sovereignty. Grasping a part of the chips' global economic output is crucial for Occidental nations and notably, France - where the remaining global industries mainly consist of the automotive sector - to avoid a further downgrade.
Written by Matthieu Nerisson, Strategic Consultant
Sources
[1] Terra Bellum, 'Why should you be concerned with semiconductor shortages'
https://www.youtube.com/watch?v=-dHXmJa8vRo
[2] Bloomberg
https://www.bloomberg.com/graphics/2021-chip-production-why-hard-to-make-semiconductors/
[3] Deloitte