Chip Wars: Strengthening Supply Chains Means Ripping Them Apart To Nationalize Production
If there was ever a successful example of globalization, it was chip production.
Read the report below first:
Then move to this summary for updates:
This great report by BCG and the Semiconductor Industry Association provides a fabulous overview of how chips are made, their value chain, and how their supply chains are being “strengthened.”
It is a MUST READ even though it is a few years old because of the way it breaks out the chip value chain! I found this report captivating, and it answered many of my lingering questions about chip production.
I also followed up with a more recent report from the same authors that shows the US is projected to achieve large growth in Fab capacity. Showing just how seriously Washington took chips!
Readers will note that I cover the earlier report more than the most recent. That’s because it’s flat-out more interesting, and it sets the stage for US chip bans in China and the Chip Act.
In the context of this report, strengthened supply chains mean dismantling the existing highly successful global supply chains and recreating them in individual nations.
Retooling and recreating fully national chip production is shockingly expensive.
Making chips is so expensive that the industry evolved its interdependent supply chains precisely to allow each nation to do what it does best and reduce costs.
With chips as the new geopolitical battlefield, no price is too high to pay to bring chip production “self-sufficiency” back onto US, or Chinese soil, even if it means ripping apart the supply chains at the seams!
👉TAKEAWAYS
🔹The highly specialized global semiconductor supply chain has supported the industry’s continuous technology innovation, benefitted consumers, and delivered enormous value.
A fully self-sufficient local supply chain in each region would require at least $1 trillion in incremental upfront investment and result in a 35% to 65% overall increase in semiconductor prices
🔹 Geographic specialization has created vulnerabilities in the global semiconductor supply chain.
-There are more than 50 points across the value chain where one region holds more than 65% of the global market share.
-About 75% of global semiconductor manufacturing capacity, for example, is concentrated in China and East Asia, a region significantly exposed to high seismic activity and geopolitical tensions.
-100% of the world’s most advanced (below 10 nanometers) semiconductor manufacturing capacity is currently located in Taiwan (92%) and South Korea (8%).
🔹 Government action is needed to address vulnerabilities in the global semiconductor supply chain and ensure its long-term strength and resilience.
So here it is from the 2021 paper: We estimate that a $50 billion incentive program would enable the construction of 19 fabs in the US over the next ten years, doubling the number expected if no action is taken.
Now, the results from the 2024 paper” Following the passage of the “Chip Act” Fab capacity is increasing in the US for the first time in “decades.” See below!
From the newer publication: The U.S. share of global fab capacity has experienced a multi-decade decline, decreasing from 37% in 1990 to 12% in 2020, and further declining to 10% as of 2022. The report projects U.S. fab capacity would have declined further to 8% by 2032 without ambitious action to promote new investment. Based on announced projects to date, new investments in the U.S. are forecast to increase America’s share of global fab capacity to 14% by 2032, marking the country’s first increase in decades.
👊STRAIGHT TALK👊
The saddest thing about the chip war is that it is ripping apart supply chains that were specifically designed to produce chips at the lowest cost.
Once again, as with all wars, it is the people who will pay the bill.
The chip industry's general setup was that the US led in R&D-intensive activities, supported by its “talent magnet,” while Asia led in capital-intensive activities, supported by government incentives.
As an example of how expensive production is in the US, BCG found that total cost of a new fab located in the US is approximately 25-50% higher than in Asia, and 40-70% of that difference is attributable directly to government incentives (example, Taiwan).
So, while the prognosis is good for US chip production given the chip act and a dramatic rebound in Fab capacity, the reality is that US citizens will foot the bill, both in taxes and in higher chip costs.
There is one more potential problem not yet addressed. Predictions of Fab construction and actually building and staffing them are two different things. There is a shortage of labor for these Fabs, and it is important not to “count your chickens before they are hatched.”
While most can agree that some level of domestic chip production is important for security interests, what is unclear is how much we’ll all have to pay for it.
Thoughts?
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