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Roughly every five years in the last three decades, the semiconductor industry has faced notable chip shortages. These were commonly due to external influences like economic downturns or natural catastrophes. But sometimes it "just happened" as a result of increased demand for emerging technologies or the introduction of new digital products or next generation devices. This "routine" cyclicality was disrupted in 2020 by the pandemic which first halted production in the Far East before triggering an unprecedented increase in demand. The supply-demand balancing act of the past (fluctuations between demand, increased production, surplus, slowdown in production, shortage, and so on) was replaced by a more complicated reality. Today, with supply chains finally regaining stability, the market was also expected to steady. But into the picture entered the geopolitical tension between the United States and China, with the semiconductor industry in the line of fire.

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Renana Ashkenazi, General Partner at Grove Ventures.

(Yoram Reshef)

The current state of the industry is a good opportunity to review some macro events and trends that have a significant impact on it:

Whats between the US-China mess and the semi industry?

You dont need to be a geo-political expert or a semi enthusiast to have heard about the link between the two.

Key players in the global supply chain: Both the U.S. and China play crucial roles in the global semiconductor supply chain. The U.S. is a leader in chip design and advanced manufacturing processes, while China is the largest consumer of semiconductors and plays a significant role in assembly, packaging, and testing.

Trade restrictions: The trade restrictions imposed by the U.S. government have limited the access of certain Chinese technology companies to American-made semiconductors and software. The U.S. issued embargo regulations over China in 2022, which prohibit the sale to China of advanced chips with high performance and fast interconnect speeds. The provisions also restrict any sale to China of equipment used to manufacture advanced chips. In a rare move, those restrictions target not only companies but also individuals: If an American citizen, green-card holder, or entity wants to assist China in developing its semiconductor industry, they must apply for prior approval. Considering the fact that U.S. companies design more than 95% of the AI chips that are used in China, and produce manufacturing equipment that is used in every single Chinese chip factory, this inevitably is forcing Chine to try to become self-sufficient.

Efforts to boost domestic production: As a result of the tension and the perceived vulnerability of the supply chain, both countries are taking steps to boost their domestic semiconductor capabilities. The U.S. is investing billions in domestic chip production and R&D to reduce dependence on foreign supplies, while China is investing heavily in its semiconductor industry to achieve self-sufficiency. These actions will undoubtedly reshape the global semiconductor landscape.

National security concerns: Semiconductors are critical not only for PlayStations and Teslas, but they are also critical for military and defense technologies. This makes the control over semiconductor technology and supply chains also a matter of national security for both countries a tricky situation even among friends.

Supply chain has increasingly become one of our industry's most significant challenges.

A typical chip might be designed by ARM (Japanese-owned, UK-based) by a team of engineers in California and Israel, using design software from the United States. When the design is complete, it's sent to a fab in Taiwan, using silicon and gas sourced from Japan. Many of the etching tools in the fab are produced by a Netherlands-based company. The chip is then packaged and tested, often in Southeast Asia, before being sent to China for assembly. This is what youd call a global supply chain.

In the wake of the 2020 crisis, organizations have had to alter their approach to supply chain management, enhancing production and material availability capacity in a variety of ways, such as:

Diversifying sourcing options - including dual sourcing and finding new suppliers.

Smart design - modifying designs to reduce component count.

Streamlining supply chains to decrease lead time cycles.

Using express shipping to cut down transportation time.

Companies are also working to expand the pool of available materials, by improving the repair cycle, salvaging more used parts, and enhancing supplier risk management.

Globalization a thing of the past?

While globalization was once encouraged, it now seems we're heading in the opposite direction. As the U.S. and China lock horns, the American congress has allocated $53 billion to move manufacturing from the far east to the USA, and several European nations are also planning to establish local fabs.

The semiconductor industry used to thrive on a complex global supply chain, with each region contributing based on its strengths. The U.S. is known for its superior core IP and chip design, while East Asia leads in wafer fabrication, supported by substantial capital investment and government incentives, and China dominates in assembly.

Not only did this model work well, but it also saved a lot of money. But it clearly suffers from its vulnerabilities as it relies on free trade which can be compromised by geopolitical tensions, mother nature, and the current global virus. Semiconductors have become a critical resource, so having 80% of their supply concentrated in a single region probably should have never made sense in the first place and doesnt make sense now. The only realistic solution is geographic diversification, and we are definitely seeing localization trends which will impact cost but also create plenty of local opportunities.

Some optimism to end with:

Given the ubiquity of digital devices in our everyday lives, the need for semiconductors hasnt shown any signs of stopping, thanks to the growth of cloud computing, cryptocurrency mining, 5G, and AI. Consequently, the long-term growth projection for the industry remains promising. Cutting-edge technologies in fields such as cloud computing, big data, AI, crypto mining, 5G, mobile, medical devices, and electric vehicles demand ever-increasing computing capabilities, further propelling leading industries and the microelectronics sector. It's anticipated that by 2030, electronics will account for 45% of the manufacturing cost of autonomous vehicles.

Renana Ashkenazi is a General Partner at Grove Ventures

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From chip shortages to global chess: Geopolitical struggles are ... - CTech