Tuesday, June 15

The Market Ramifications of Semiconductor Manufacturing Localization

By: Anton Kozyrev

For much of the 20th century, there was one crucial commodity that rose above all others to assume its position atop the global pyramid of desirable goods, so to speak. We speak, of course, of oil. That is not to say that oil only became prominent in the 20th century — far from it. During the 19th century’s phase of rapid industrialization and almost rhythmic conflicts between economies of scale and labor unions, one thing held absolutely constant — the importance of oil as a key driver of further economic development and industrialization.

The beginning of the following century only further defined the parameters of industrialization, with a central focus on oil. With the discovery of the Spindletop Geyser in 1901, the oil industry grew at an almost exponential rate. From there onward, much of foreign policy and business practice for large industries revolved around an accessibility to oil. In the interwar years (referring to the period between the First and Second World Wars), companies searched for opportunities to expand their access to marketable oil. In the 1930s, the Standard Oil Company of California — which would later be known as Chevron — signed a concession agreement with the newly-established ruling power of Saudi Arabia — Ibn Saud, the first king of newly-formed Saudi Arabia.

As the 20th century progressed, oil became no less important. It has been a factor — but not the driving cause — in numerous conflicts, from Iraq’s invasion of Kuwait to the Chaco War between Bolivia and Paraguay. This has led some to wonder — is our fixation on oil coming to an end?

Given the shift in global technological ambitions and dynamics, it would certainly seem so. One might argue that if anything, semiconductors are the “oil of the future.” Semiconductors are crucial to electronics and technologies because of their capability to be used in electrical circuits, wherein one can control the flow of electrons in a material by means of a controlling current. One might argue that semiconductor access can’t possibly be as fraught as that of oil. After all, oil occurs naturally, whereas humanity can simply manufacture semiconductors.

Yes. This is true. However, the manufacturing of semiconductors is not spread evenly on a global scale.

When one thinks of critical, sophisticated technological components, many often look to the most typical countries in these industries — such as the United States and South Korea. And this is not entirely wrong — South Korea is indeed the second largest producer of semiconductors — accounting for 18 percent of the global share, most of which is manufactured by Samsung. However, South Korea’s share pales in comparison to that of the global foundries leader, Taiwan.

Taiwan as a nation accounts for 63 percent of the global market share — undeniably a huge majority. 54 of that 63 percent is manufactured by Taiwanese Semiconductor Manufacturing Company (TSMC). This places the technological future and stability of the global technology industry and network largely in the hands of one corporation in Taiwan.

Needless to say, the position of the Republic of China is precarious. Situated a mere 160 kilometers from the southeastern shores of mainland China, the island nation often faces threats, both economic and military, from the People’s Republic of China — which views the self-governing nation as a rogue province. The critical aspect of this dynamic is the very fact that if China launches an aggressive military campaign against Taiwan, the entire world will be sent reeling. With the global semiconductor supply halved, the global economy will grind to a standstill and technological development will be rendered obsolete. It is worth noting that semiconductors, by the very nature of their manufactured origin, are different from oil. In particular, they are different in the sense that while a nation may theoretically invade another to obtain its oil resources, invading a nation by no means guarantees the survival of its semiconductor industry. In fact, a military takeover of Taiwan would almost certainly decimate this critical portion of the global industry.

Both Taiwan and its close partner, the United States, understand the risks associated with such a concentrated production of such a vital resource. As such, TSMC is establishing a $3.5 billion manufacturing plant in Arizona, which will help to mitigate some of the risks. However, experts assert that it is not enough to counteract the potential losses if the tensions in the Taiwanese Strait reach an unfavorable outcome. The fallout of a decimated semiconductor supply chain is an outcome that benefits nobody, from Washington to Beijing to Taipei.

There is no easy solution to this. The best that can be done is a gradual, slow approach toward diversifying the supply of semiconductors on a global scale. Despite a diminishing immediate demand for oil and petroleum, nations are still aggressively pursuing new means of obtaining oil, from opening up preserved lands for oil drilling to forging international partnerships in the pursuit of easy access to oil. It would behoove the global economy and yes, the world as well, if nations step back and reassess their focus on oil. Perhaps, after a closer look, more nations can reassign priority to securing the lifeblood of future technological development, semiconductors, and develop more robust, diversified foundries around the world.

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