Semiconductors are the fundamental building blocks of our world. We use them in computer chips, which run our smartphones, computers, tablets, cars, washing machines, televisions, LED lights, and indeed, anything that’s computerised. Which is a lot.
Semiconductors are an essential element in advanced computer chips that drive economic and scientific advancement as well as military capabilities. The supply chains that produce these chips are complex and globally integrated – the rearrangement of production and supply chains for semiconductors has significant implications for future technological competition and international security. We have some sense of what a shortage of semiconductors might feel like. Over the past year, the COVID-19 pandemic has meant automakers have faced a supply shortage of semiconductors. The shortage has forced them to pause production on certain vehicles and disrupted the automotive supply chain to the tune of around USD60 billion (AUD80 billion) in lost sales.
What are semiconductors and what are they used for?
Semiconductors are used extensively in electronic circuits and possess specific electrical properties. As its name implies, a semiconductor is a material that conducts current, but only partly.
In other words, it is a material – usually a solid chemical element or compound – that can conduct electricity under certain conditions but not others. Silicon, germanium, copper, and gallium and arsenic are all examples of semiconductors, and all have different uses.
Where do they come from now?
Over the past decade, semiconductor manufacturing capabilities have been concentrated among a handful of companies in just a few global locations, including Samsung in South Korea and TSMC in Taiwan. Intel in the US is currently in third place.
The most heavily relied upon resource used to produce semiconductors is silicon, 64 percent of which is produced in China, with Russia the next highest producer at 9 percent. Japan produces 7 percent, and the US, along with Norway, is at 5 percent.
The geopolitical competition is heating up
Semiconductors are essential for almost every aspect of modern life, and increasingly central to national security. We are now seeing geopolitical competition between the United States and China playing out in efforts to ensure semiconductor supply chain security. On 8 June 2021, the United States’ Senate passed a bill with broad bipartisan support to invest USD250 billion (AUD333 billion) into innovation and competition, including the domestic production of semiconductors.
This investment has been described by the US Democrats as a response to the current market dominance of foreign competitors, including China, in the production and manufacture of these essential elements. While global competition is increasing, the US semiconductor industry remains a market leader, contributing 39 percent of the total value of the global semiconductor supply chain. This global trend towards competition in the global semiconductor supply chain has very real implications for Australian business.
This strong concentration of supply of critical components like silicon and manufacturing of semiconductors in places which the US considers as unreliable partners, if not strategic competitors, creates obvious risks and vulnerabilities to global technology supply chains, and, ultimately, national security interests. Since the US – under former President Trump – declared China a strategic competitor in his administration’s first national security strategy in late 2017, the US has been challenging China’s pursuit of technological dominance. China launched its ‘Made in China 2025’ policy in 2019 with the clear goal of catching up with and then surpassing Western technological prowess.
The US and some other major industrialised countries see this strategy not only as a challenge to international trade rules, but also a security risk. US President Biden has described the US’ investment in semiconductors as being key to the “competition to win the 21st century”.
As the US looks to invest more into domestic production, and at the same time, pushes for more controls over semiconductors and related technologies, the decoupling of the tech sector will intensify. This competition is not just confined to the US and China, either. European countries are also looking to take a leading role in counterbalancing the predominance of Chinese technology.
So what for Australian business?
The developments in semiconductor production competition matter for the Australian economy and Australian industry. They also matter for the distribution of geopolitical and military power into the future, given that access to cutting-edge semiconductors is critical for modern and next-generation weapons platforms.
Australia, like anywhere in the world, needs a reliable supply of semiconductors both right now, and as it faces into the future, including in our transition to a net-zero economy.
On the one hand, having the US strengthen its semiconductor manufacturing capabilities builds stability and security for us. However, at the same time, the potential for an increasingly decoupled and competitive technology and semiconductor landscape will create considerable uncertainty. In addition to the risk of disruption to global supply chains of products which rely on semiconductors, businesses need to consider what further tech decoupling and an increasingly competitive technological landscape will mean for how the world in which they do business looks and functions.
It’s time for some very strategic thinking.
Thanks to Liam von Blanckensee and Daniel Ginger for research support on the article.