Global effort needed to boost the supply of semiconductors

Chips, the common name for semiconductors or integrated circuits, are in short supply. The reason is largely down to the Covid-19 pandemic, which caught electronic manufacturers off guard with explosive demand for products for at-home work, education and entertainment. America’s trade and technology war with China has also disrupted flows, leading to stockpiling by firms and rising prices for consumer goods. Governments have responded with nationalist and protectionist strategies, seeking billions of dollars in investment to increase domestic production, moves that could have a negative impact on globalisation and its benefits for the world.

No single company can claim to be able to produce a chip from design to end product. The process involves a complex network of firms in Asia, Europe and North America to plan and manufacture and supply the raw and finished materials, technology and machinery. But almost half of the world’s production is centred on Taiwan and South Korea, which are able to make the most advanced chips and therefore have the greatest demand and financial returns. Orders cannot be filled fast enough; the impact affects supply of goods, consumer prices, company profits, employment, inflation and even national security.

American sanctions have forced China to significantly boost research and investment into chip manufacturing. United States President Joe Biden has also made domestic semiconductor production a priority, continuing an approach adopted by his predecessor, Donald Trump. The US was once the global leader, having about 37 per cent of world manufacturing in 1990, but that has shrunk to 12 per cent. South Korea has about 26 per cent, Taiwan 23 per cent, Japan 16 per cent and China 14 per cent.

The surging demand and disruption to supply chains caused by the pandemic and trade dispute has had a profound impact on chip production. Pat Gelsinger, the new chief executive officer of the world’s biggest semiconductor maker, the US company Intel, last week said it would take “a couple of years” for the industry to rectify the shortfall. The misjudging of demand by electronics and computer producers and carmakers means price rises are inevitable.

Chips are essential components for artificial intelligence, 5G and 6G telecommunications, electric and autonomous vehicles, power efficiency, quantum computing and a host of other technologies necessary for the world’s future development. Semiconductor shortages have prompted governments to adopt nationalist agendas to boost domestic production. But they have to be careful not to let nationalism get in the way of healthy competition. As China can attest with its steadily growing middle class with ever-increasing spending power, globalisation is an important economic driver.