If there is one thing that COVID-19 continues to teach us is to not underscore the early signs of any crisis. This holds particularly true for the ongoing chip shortage. The severity of the shortage is nothing less than a famine for the industries affected by it, with recovery nowhere near in sight. The crisis now lurks under almost every electronic product that is part of our lives. The demand-supply gap has exacerbated the already existing supply chain bottlenecks.

Reaction to tech famine

We all know how this semiconductor crisis started after COVID-19 triggered a mega-surge in electronic equipment demand. The crucial question is what can be done and how soon it must be done. For any economy, the ability to bounce back from a shock or crisis is a sign of it being a resilient economy. However, the ongoing crisis is yet to make even a single economy stand this test. This clearly shows the dangers of taking a monopolistic route to the supply of critical components. Governments across the world are now ramping up solutions by investing in indigenous semiconductor manufacturing and funding research incentives.

Supply chain relook and changing policy interventions

The shortage has not only affected the smartphone and allied space but also industries like automobiles. All this has brought under focus the concentration of global chip manufacturing in a few East Asian countries. Taiwan’s TSMC and South Korea’s Samsung, along with manufacturers in Japan and China, dominate this space globally. This has translated into a relook at the supply chain structure and a renewed focus on ‘self-sufficiency’ in regions like the EU and US, which are now keen to boost their domestic production capacity.

Policy intervention by US

The Biden administration has brought in the Innovation and Competition Act and intends to spend $52 billion for the semiconductors sector. Further, a 100-day review of the supply chain crunch has been conducted. It covered key semiconductor product lines, advanced batteries used in EVs and regulatory changes as well. Biden has unveiled an infrastructure plan worth $50 billion for the American semiconductor industry as a measure to subsidize domestic manufacturing and chip research. The $50 billion amount is expected to go towards production incentives and research and design, including the creation of a National Semiconductor Technology Center.

Policy intervention by EU

One of the most recent and comprehensive measures undertaken to address the chip shortage has been by the European Commission. It recently announced a new plan for a chipmaking ‘ecosystem’ to keep itself competitive and self-sufficient. The commission is planning for a ‘European Chips Act’ that would accelerate the development of advanced semiconductors across the EU region. The Act also proposes to have a semiconductor research strategy and bring together European chip production efforts, along with a framework for international cooperation and partnership. Significantly, as part of the plan, the EU will aim to produce at least 20% of the world’s semiconductors (by value) by 2030, up from 10 % last year.

Policy intervention by South Korea

The next big move is from South Korea, which is currently the second-largest producer of computer chips after Taiwan. In May this year, South Korea announced to spend $451 billion on domestic semiconductor production over the next decade. The said investment will be led by Samsung Electronics and SK Hynix under a national blueprint finalized by the government, along with 151 other companies. The investments will be focused on the “K-semiconductor belt”, a newly named region south of Seoul that hopes to be the epicenter of South Korea’s semiconductor push.

Policy intervention by Taiwan

Taiwan, which has some of the biggest and advanced semiconductor foundries in the world, is also actively working with stakeholders to solve the semiconductor crisis. Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest contract microchip maker, too is likely to invest around $100 billion over the next three years to meet the rising demand for semiconductors. Moving beyond borders, TSMC plans to expand its state-of-the-art semiconductor foundry in Arizona, US, which is also one of its integrated manufacturing units outside Taiwan.

Policy intervention by Japan

Japan too is exploring every opportunity to stay in the race. Its recent release of the Semiconductors and Digital Industry Policy is one such move. From contributing 50% (in the 1980s) to the global semiconductor production to its present share of around 10%, Japan has fallen behind significantly. The government, realizing the strength of its decade-old semiconductor industry, is now keen to do something not only to regain manufacturers’ faith but also to retain the existing ones. The government has also joined forces with TSMC and some 20 Japanese chip-making companies to set up a fab factory by 2023.

Policy intervention by India

India too is readying policy infrastructure to chase its dream of becoming an innovation-driven global manufacturing hub for mobile phones, IT hardware, automotive, industrial and medical electronics, IoT and other devices. After circulating an expression of interest (EoI), the government has now circulated request for proposal (RoP) documents to seek formal applications from companies to set up semiconductor plants in the country. The government had even unveiled a Scheme for Promotion of Manufacturing Ecosystem (SPEC) to offset the disabilities of India’s manufacturing and semiconductor ecosystem and strengthen its stand on ‘Make in India’ and ‘Digital India’ programs. Most recently, NXP India has collaborated with the Ministry of Electronics and Information Technology (MeitY) and Fabless Chip Design Incubator, IIT-Hyderabad, to start a ‘Semiconductor Startup Incubation and Acceleration Programme’ to facilitate semiconductor and IP design start-ups across India.

Situation now

Current production and demand trends suggest that the shortage is expected to continue until the first half of 2022. Foundries are already increasing wafer prices and, in turn, chip companies are increasing prices. One such example is the recent announcement by TSMC, one of Apple’s leading SoC suppliers, to increase chip prices by up to 20%. The crisis is all real and has become one of the key talking points among different governments and business leaders. India Prime Minister Narendra Modi met Qualcomm CEO Cristiano Amon this month during his visit to the US and discussed the need for a diversified semiconductor supply chain, along with other topics including 5G, vRAN and digital transformation.

Risks and anticipations

Although most cutting-edge semiconductor technology comes from the US, the lion’s share of manufacturing goes to East Asia, particularly Taiwan and South Korea. Over 83% of the global foundry revenue is generated by companies headquartered in Taiwan and South Korea. Consequently, the manufacturing facilities, equipment and materials are concentrated in a handful of countries. This makes the economics of semiconductor manufacturing an important geopolitical tool.

Efforts to rejig supply chains by abandoning one market may end up dragging the industry into a new cold war. Even as governments the world over race to deal with this crisis while keeping the geopolitics involved in mind, the winners as we see would be the ones who pursue innovation.