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What the clash of semiconductor supremacy means

Ever since the pandemic hit early last year, supply chains have been stressed, and consumer demand has exhibited herd characteristics. In response to the crisis, and perhaps as a result of our increased time at home and on social media, demand is often exceeding supply when it comes to items that a lot of people all of a sudden really need.

Electronics and computers are an obvious example of this, and the situation is about to get a whole lot worse.

There is currently a global shortage of semiconductors, computer chips that are used in all of our electronics. It’s become so acute, that it has elevated this problem to the level of national security issue:

Top Biden administration officials will hold a second summit with industry leaders on Monday to discuss semiconductors, as a shortage of the chips continues to stall auto manufacturing and threaten jobs across the country.

The White House said National Security Adviser Jake Sullivan, National Economic Council Director Brian Deese and Secretary of Commerce Gina Raimondo will discuss semiconductor supplies, and the American Jobs Act, with executives from about 20 companies, including top chip and auto makers.

The meeting follows an earlier summit the administration called in February to address the supply shortage, but the situation has since worsened, with GM and Ford announcing Thursday plans to temporarily idle more North American factories that can’t get enough semiconductors. The GM shutdowns, lasting a week or two per factory, affect 10,000 workers.

The auto industry tends to make news not just because cars dominate our culture, but because the auto industry is a sprawling ecosystem of suppliers and contractors who are all impacted if there’s a slowdown in production.

Similarly the auto industry is symbolic, as what’s happening to them in this instance is also happening to a lot of other industries who are impacted by this chip shortage.

Yet in the case of the auto industry, part of the issue is they buy older chips, and it is profitable for companies to focus on manufacturing newer ones.

The shortage that is currently being experienced is not specifically a shortage of chips themselves, but rather a shortage of manufacturing capacity. Capacity that can no longer keep up in demand. And capacity that has up until now been largely centralized in Taiwan.

While Taiwan has been quite successful in containing and combatting the pandemic, drought and climate change are the latest threat to the semiconductor industry there.

Chuang Cheng-deng’s modest rice farm is a stone’s throw from the nerve center of Taiwan’s computer chip industry, whose products power a huge share of the world’s iPhones and other gadgets.

This year, Mr. Chuang is paying the price for his high-tech neighbors’ economic importance. Gripped by drought and scrambling to save water for homes and factories, Taiwan has shut off irrigation across tens of thousands of acres of farmland.

The authorities are compensating growers for the lost income. But Mr. Chuang, 55, worries that the thwarted harvest will drive customers to seek out other suppliers, which could mean years of depressed earnings.

“The government is using money to seal farmers’ mouths shut,” he said, surveying his parched brown fields.

Officials are calling the drought Taiwan’s worst in more than half a century. And it is exposing the enormous challenges involved in hosting the island’s semiconductor industry, which is an increasingly indispensable node in the global supply chains for smartphones, cars and other keystones of modern life.

This gives a glimpse as to why semiconductors are becoming a national security issue, as that reflects the reality that it is also a major environmental issue. It’s not just Taiwan that is choosing its semiconductor industry over its agriculture. For sure there are governments, most notably the United States, urging them to do so.

Taiwan’s response to all this is to double down on their advanced manufacturing industry.

More than 90 percent of the world’s manufacturing capacity for the most advanced chips is in Taiwan and run by TSMC, which makes chips for Apple, Intel and other big names. The company said last week that it would invest $100 billion over the next three years to increase capacity, which will likely further strengthen its commanding presence in the market.

TSMC says the drought has not affected its production so far. But with Taiwan’s rainfall becoming no more predictable even as its tech industry grows, the island is having to go to greater and greater lengths to keep the water flowing.

In recent months, the government has flown planes and burned chemicals to seed the clouds above reservoirs. It has built a seawater desalination plant in Hsinchu, home to TSMC’s headquarters, and a pipeline connecting the city with the rainier north. It has ordered industries to cut use. In some places it has reduced water pressure and begun shutting off supplies for two days each week. Some companies, including TSMC, have hauled in truckloads of water from other areas.

But the most sweeping measure has been the halt on irrigation, which affects 183,000 acres of farmland, around a fifth of Taiwan’s irrigated land.

While this story may seem obscure, it is, unironically, being felt across society. A quick search on Twitter shows this explanation from a hip hop daily news outlet:

Bloomberg has been doing extensive coverage of this, but sadly their tweets and articles don’t display well here on substack, so I avoid using them, but this summary is relevant:

Semiconductors, also known as integrated circuits or more commonly just chips, may be the tiniest yet most exacting product ever manufactured on a worldwide scale. That level of cost and difficulty has fostered a growing dependence on two Asian powerhouses — Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. Rising tensions between the world’s two biggest economies have exacerbated the reliance, with the U.S. government cutting off supplies to certain Chinese customers.

Now world leaders from Washington to Beijing are making chip supplies a top priority for their governments, to keep factories running and ensure national security. Hundreds of billions will be spent in a plethora of sectors in coming years on a global “chip race” with geopolitical as well as economic implications.

Part of this involves pressuring existing manufacturers regarding what they produce. However it also involves massive investment towards creating domestic chip production.

Washington has seen that a handful of missing parts can close auto factories across the country, jeopardizing the security of workers and hurting the prospects for recovery from the Covid pandemic. Government officials from the U.S., Germany and Japan have gone hat in hand to Taiwan to plead for more chips to avoid economic disaster.

China has learned that the U.S. is willing to choke off chip supplies to its national champions, a vulnerability that Xi Jinping and the Communist Party view as intolerable. Beijing will pour more than $100 billion into efforts to build its own domestic chip industry. Xi has made technological development a national priority.

The result is that governments and companies will clash for years to come over semiconductor supremacy. Taiwan and South Korea are well positioned, giving them economic and geopolitical might. The U.S. and China will have to invest heavily to keep up with the industry’s best, or risk losing their world leadership.

While it is not clear whether attempts to ramp up domestic production will be successful, the efforts will partly be focused on speed and scale. Given that this kind of production requires precision, it’s not clear whether these efforts will be successful, or whether they will consume far more money and time than suggested.

Meanwhile there’s all sorts of commentary and finger pointing when it comes to unravelling how all this happened.

While this view is simplistic, it’s also not entirely wrong.

However perhaps the best way to understand all of this, is in the context of shifts in geopolitics, in particular a decoupling of the United States and China which accelerated under the last administration and shows no sign of slowing down under the current one.

Have stockpile of semiconductors become new measures of strategic national security priorities?

Supply chains are definitely receiving greater scrutiny, and over the next year, at least, will continue to experience ongoing disruption.

For us, as technology users, you can already see it. New computers and computer parts are hard to find. Even the refurbished market is starting to dry up and/or increase in price.

We’re about to enter a kind of tech drought, in which we’ll see some new products, but the overall availability of consumer technology will be limited, as will potentially industrial and commercial technology.

However at the end of said drought, we can also anticipate a deluge. As the manufacturing capacity around the world ramps up substantially.

That may trigger an explosion of technology, data, and automation, that just like this current shortage, the world may not be sufficiently prepared for.

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