The news on 18 November that US car makers Ford and GM are to manufacture their own semiconductor chips is a further sign that the globalisation that predominated before the 2008 crash is being thrown into reverse. With coronavirus battering hyper-extended supply chains, and as stocks of critical commodities such as silicon chips run short, the case for integrating production inside a business is clear. Free trade and free markets are not equipped for a global environment subject to the kind of shocks we have seen in the past two years. Major manufacturers will depend increasingly on active support from their governments in securing supplies.
Three factors have created the global semiconductor shortage. First, Covid-19’s disruption to production and distribution, with factories in Taiwan and South Korea closing as a result of virus outbreaks and lockdowns. Combined with the global transport problems coronavirus has created, the supply of silicon chips to manufacturers has all but broken down in the past 18 months. Industry analysts do not expect this shortage to be resolved before 2023 at the earliest.
Second, extreme weather events have disrupted the sensitive manufacturing process for silicon chips at a number of fabrication plants. Droughts in Taiwan have threatened production at the world’s largest facility, Taiwan Semiconductor Manufacturing Company (TSMC) – silicon fabrication requires huge quantities of fresh, super-clean water to preserve the purity of the process, with TSMC typically using 156,000 tonnes of water every day. On the other side of the world, severe winter storms halted production at chip manufacturing plants in Texas.
Third, Chinese electronic manufacturers, anticipating US-imposed trade tariffs, have been stockpiling silicon chips over the past few years. Huawei is estimated to have bought up two million units of the TSMC-manufactured Tiangang chip, enough to supply two years’ worth of its 5G installations, before the Trump-era ban on suppliers selling chips to Chinese firms came into force late last year. This “competition for inventory” has led some Chinese manufacturers to pay up to 20 times normal prices for chips, sparking a competition investigation by the Chinese authorities of domestic semiconductor manufacturers. The result is a further global squeeze on supplies.
These three related shocks come at the end of 20 years where soaring demand for electronic components, driven by falling prices and the extraordinary expansion of the digital economy, has produced record profits in semiconductor manufacturing. The need to produce at scale to satisfy rising demand, meanwhile, has led to consolidation in chip manufacturing. A few major producers, Samsung, Intel and TSMC among them, take the majority of all profits in the industry, and their share has risen dramatically in the past two decades. In an intensely competitive industry, only those companies able to operate at enormous scale can consistently generate profits.
The combination of external shocks and intense competition within the industry is drawing these giants closer to their national governments for support. America’s aggressive moves against Huawei and other high-tech Chinese companies – although presented as being due to national security concerns – were directed against a perceived threat to the market positions of US companies. Governments themselves are becoming more actively engaged in supporting their domestic industries, with the US Senate passing a $52bn support package for domestic semiconductor manufacturers earlier this year, while the EU is looking to loosen state aid rules to allow direct government support for chip manufacturing. The shocks of the last two years – Covid, stockpiling and strategic purchasing, and environmental disruptions – are only likely to worsen in the future, compelling further government support.
The post-Brexit UK has its own version of this story, in the Conservative government’s flip-flopping over whether to protect Cambridge-based chip designer Arm from overseas purchases. Arm designs are at work in the majority of the world’s semiconductors, from those in Apple’s MacBook to those in Samsung mobile phones. In 2016, this British technology success story was sold to Japan’s SoftBank – a vast, diversified investor – with few strings attached. But now an investigation has been opened by the new Digital and Culture Secretary Nadine Dorries into SoftBank’s planned $54bn sale of Arm to US manufacturer Nvidia – potentially the largest ever for the semiconductor industry – on competition and national security grounds.
Nvidia’s competitors have been loud in complaining about the Arm sale, arguing that Nvidia would be able to exploit Arm’s in-house knowledge and technical insight to carve up the market in favour of its own semiconductor products. The UK government appears to agree, in opening an investigation that could block the deal, and an EU investigation is also expected to be opened shortly.
Car manufacturers on one side, national governments on the other: both are moving to bring the neoliberal era to a close in a crucial commodity. For a UK government overseeing an economy with precious few world-leading tech companies, the smart move would be to block the Arm sale and to take a stake in the company itself – using Arm’s expertise and resources to build a domestic high-tech capability.
The parts needed to do this are all there, from world-class university departments to smaller-scale semiconductor fabrication capacity. And yet the sale of the UK’s largest semiconductor manufacturer, Newport Wafer Fab, to Chinese-owned Nexperia was waved through over the summer. Without the kind of government coordination and support that China, the US and even the EU are bringing to their semiconductor industries, Britain will be throwing away its own opportunities to compete.
[see also: The last days of Silicon Roundabout]