LACK OF COMPUTER CHIPS THREATENS THE GLOBAL ECONOMY

The increasing occurrence of freak weather incidents will have both local and global effects. Even in cases where production has been re-localized, freak weather can still greatly impact local economies. Clearly relocalization is not the solution to all problems.

It might seem unlikely that a small but vital component would threaten globalized production, but a shortage of semiconductors disrupted a number of manufacturing industries simultaneously. Problems became critical in 2020 but had been simmering before then. World demand for chips has continued to rise in step with the advances in technology and the widening array of smart products now becoming common in consumer markets. Smartphones and other electronic devices are only the start. Cars have become increasingly reliant on chips. The rising demand for 5G in telecommunications, cloud computing and AI are all exerting pressure on semiconductor manufacturers. And the 'internet of things' is continually expanding, as functional advances in products such as fridges and air conditioners require an increasing supply of chips. Surely this heightened demand was foreseeable and the manufacturers would have scaled up production accordingly? We would assume they could forecast rising demand. And, in fact, factories have increased output, but demand was greater than anticipated.

Most of the world's semiconductor manufacturing capacity is concentrated in large manufacturers in Asia, which produce 75% of the world's supply. These include TSMC (www.tsmc.com) of Taiwan and Samsung (www.samsung.com) of South Korea. Samsung has manufactured chips for many years despite the prevailing trend to focus on core competences and use external suppliers for basic components. TSMC of Taiwan has become crucial to global supply chains. China, which has only limited chip manufacturing capacity, relies heavily on TSMC to meet the huge demands of its tech industries. This is a sensitive issue politically, as China seeks reunification with Taiwan. Taiwan, for its part, is boosted by the success of TSMC, its semiconductor champion, which is keen to maintain its power over supply globally. TSMC is expanding its capacity, but this is a three-year plan overall and it has pledged to work at its maximum level of output in its existing plants.

The US and European countries have concluded that there is an urgent need for them to finance and build chip manufacturing capacity in their home regions. Intel, an American manufacturer, is expanding its capacity at existing factories and building two new plants in Arizona. While this was welcome news to the US president, it does not solve the problems of shortages in the short term. He has called on business leaders not simply to build new capacity but to set their sights on being global leaders. New factories are exceedingly expensive: Intel will be spending $20 billion on its expansion plans. Government support would be needed as part of an industrial policy if coordinated expansion in this sector is contemplated by the US.

The shortages are exacerbated by some companies over-ordering chips to stockpile, fearing a lack of supply in future. In this environment, some companies are likely to lose out and even close down their production lines. Some carmakers have been caught in this position. European leaders, conscious of the damage the shortages can cause, have called for increased capacity at home to reduce reliance on East Asia.

Shortages of semiconductors have been connected partly with the COVID-19 pandemic. When manufacturers such as carmakers reduced production in the lockdowns, a result was a slowdown in production by the large chip manufacturers. However, demand for electronics actually increased during the pandemic, as consumers bought laptops and printers for working from home as well as televisions and video games consoles for entertainment when confined indoors during lockdowns.

Weather and other factors also came into play. The big freeze in Texas in the winter of 2020-21 was declared to be a state of emergency. Power outages affected chip fabrication in Texas, where the factories owned by Samsung and others are located for supplying US manufacturing companies. Typically, these factories operate 24/7, but were unable to operate during the power outages. In Japan, a large company that produces chips for the car industry suffered a major fire, disrupting supplies to Toyota, Nissan and Honda. Meanwhile, drought in Taiwan, where the leading chip manufacturers had sped up the production process, resulted in extreme water shortages. The chip manufacturers were looking at hiring tanker trucks to bring in water.

Carmakers worldwide have seen disrupted production due to chip shortages, including Ford, GM, Jaguar Land Rover and Audi. Apple's iPad and MacBook production was also affected, although production of a new iPhone went ahead as TSMC prioritized these orders from Apple suppliers.

The economic growth that countries were expecting to enjoy in the pandemic recovery period was impacted by the semiconductor supply problems. Building more factories in a variety of locations would be a long-term solution but there were no easy solutions to the shortterm shortages.

Questions

What factors are to blame for the global chip shortage?

Why has Taiwan production become so critical globally?

Compare the strategic situations of the US and China in relation to chip supplies.

To what extent do these shortages cast doubt on the globalization of production?