Semiconductor shortages are ending an period of globalization
A year since the beginning of the COVID-19 pandemic, supply and demand in the global economy have been mixed up. At the beginning of the crisis there was panic about the supply of essentials, selfish buyers hoarding toilet paper and mineral water. Shortly thereafter, the demand for personal services in restaurants, live entertainment, and retailing disappeared, leading to massive unemployment that further constrained demand. At the same time, consumer spending in general shifted massively towards internet-based services, making America’s billionaires 40% richer by January than a year earlier. Employment at Amazon has nearly doubled to meet that demand.
Reinforced by the stimulus payments from Trump and Biden, these dramatic shifts in demand lead to new bottlenecks. The most complex goods in short supply today are semiconductor computer chips. The reasons for this are not difficult to identify. Today, many employees work from home, which is driving the demand for new computers, digital webcams, and other devices. You and many others have sought entertainment from new televisions and video game systems. And after a sharp slump in car sales at the beginning of the pandemic, demand has now increased just as sharply. Many public transport commuters have switched to cars and trucks. The lack of specialized computer chips that reduce fuel consumption, for example, is holding up entire production lines for GM trucks – and some will not have them at all.
As the backbone of the high-tech economy, the government is now pushing for $ 37 billion to be invested to help revitalize semiconductor manufacturing in the United States.
With the enormous government incentives required to combat this crisis, the so-called era of small governments and unlimited globalization really has come to an end. President Biden has issued an executive order calling for an investigation of the national production base and supply chain infrastructure to offset “pandemics and other biological threats, cyberattacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition”. As the backbone of the high-tech economy, the government is now pushing to invest $ 37 billion to help revitalize semiconductor manufacturing in the United States.
Globalization vs. Security in Taiwan and China
The history of the semiconductor integrated circuit, also known as the “computer chip”, traces the transformation of the global economy in the late 20th century. The invention of the transistor in 1947 required huge investments in research and development and a concentration of scientific expertise that was only possible in an institution like Bell Labs. The advancement of computer technology was the result of the Cold War – massive government investment in the arms industry and the space race. To protect brand new, proprietary and very expensive technologies, semiconductor companies have been vertically integrated. A single company planned, designed, manufactured, packaged and tested its products. For this reason, Japanese and European companies tried to compete with American rulers in the middle of the century.
But these giant leaps in technology changed the business models of tech companies as they flourished. The integrated circuit (IC) logic chip and CPUs that became the personal computer in the 1980s drove the demand for existing manufacturing capabilities at American design firms soaring. Fittingly, new computer telecommunications and inventory techniques have helped facilitate the offshoring of US-developed IC chip manufacturing to East Asia.
Reduced government regulations and the easing of trade barriers in the US accelerated the offshoring trend. Ironically, only countries with strict national regulations and extensive industrial subsidies were best equipped to do the job US companies wanted. In the case of semiconductors, Taiwan led the way in building pure manufacturing “foundries”. The Taiwanese TSMC Corporation currently holds the largest global market share (28%) in semiconductor manufacturing, followed by another Taiwanese company with a further 13%.
One of the most tense dynamics in semiconductor globalization in recent decades has been the overwhelming pull of China. Ming-Chin Monique Chu argued in 2008 that the trend of both US and Taiwanese companies relocating their IC manufacturing to China was so significant that it posed a serious security challenge for all three countries. The US military and the Department of Commerce have long maintained stricter trade controls with China for goods such as semiconductors that are considered “dual use” (for both military and civilian uses). It was not until the 2000s that the USA and Taiwan allowed the export of silicon production machines to China, but only at a lower technical level and for less qualified tasks.
The coordination of this policy comes as no surprise. America remains the guarantor of Taiwan’s military security, as the People’s Republic of China claims to this day that the island falls under its sovereignty. But the semiconductor industry has become so powerful in Taiwan that top management can now basically defy the country’s nationalist politicians by breaking many of the remaining restrictions. This includes secretly sending R&D work to cheaper Chinese experts, hiding ownership, and even secretly operating certain prohibited devices.
Controlling semiconductor technology is still a problem in 2021. Only one Dutch company, ASML, makes the most advanced 5nm extreme ultraviolet photolithography equipment. They remain very scarce. TSMC enjoys almost exclusive use of these machines, while the United States intervened in November 2019 to prevent ASML from selling a machine to China. In this sense, security concerns have always haunted the globalization of computer chips and are a reason why some companies still enjoy monopoly-like power over some sectors of the industry.
The use of social capital in the face of a disaster
The coronavirus is only the second cause of a semiconductor shortage in the last decade. The Japanese earthquake and tsunami of March 11, 2011 temporarily paralyzed some production lines in Japan. In particular, the Renesas Corporation semiconductor factory was badly damaged. As a supplier to Toyota and Nissan automobile assembly lines, its failures threatened to bring auto production to a standstill in both Japan and around the world. George Olcott and Nick Oliver explain that despite sophisticated supply chains, a national culture of mutual aid, or “social capital”, enabled Japanese companies to recover quickly from this disaster.
There were such strong cultural and social ties between the management of Renesas and its customers, between 200 and 400 of them posted workers and offered to pay for part of their recovery efforts. In addition, the Association of Japanese Automobile Manufacturers coordinated the relief measures and prioritized resources to get the assembly lines up and running across the industry as quickly and evenly as possible. They also helped educate emergency responders about cleanroom maintenance techniques that may not have been used in their own factories. Eventually Renesas was ready to give up protecting confidential research and manufacturing information with so many strangers on site.
Japanese companies pioneered cost-effective just-in-time inventory management and “lean” supply chains in the 1970s and 80s. The rest of the world adopted this technique but didn’t enjoy the complementary aspects of its collaborative business culture. Olcott and Oliver believe the time has come to consider this aspect of planning between business partners in a more uncertain world.
Renouncing “slimness” for resilience
Economic and foreign policy think tanks are currently experiencing an intellectual revolution in terms of the costs and benefits of globalization. Until recently, these institutions generally supported the neoliberal notions that free markets, low inventory levels, and reduced government regulation would bring both the greatest business and societal benefits in the long run. Given the COVID crisis, climate change, and mounting tensions with Russia and China, these researchers are now placing the global economy in a more pragmatic geopolitical framework, emphasizing planning and diplomacy for long-term economic resilience to short-term gains.
The Hague Center for Strategic Studies has shown the Netherlands and the EU the full range of options to consider recovering from COVID scarcity and avoid similar problems in the future. They believe that a certain amount of “resource nationalism” is needed again – considering that countries benefit not only from GDP or tax revenues, but from consistent access to the goods that enable their companies to keep going. These include encouraging vertical integration in industries, investing in strategic warehousing and even reintroducing export quotas, tariffs and stricter licenses.
Just as important as strengthening domestic resources, however, will be the diversification of sources of goods and trade relationships. This would mean reducing overall reliance on Chinese manufacturing, possibly in exchange for higher labor costs. A national strategy could also build a network of sources in allied countries that could support each other with complementary resources in times of crisis. As was so useful in the Japan case above, they recommend coordinating diplomatic alliances for each industry.
Finally, they recommend that government policies re-promote domestic research and development to ensure long-term resilient profits. This is the ultimate solution to the dead end of the business trend of the past few decades of making short term profits by cutting costs alone. Countries like China, which until recently only focused on manufacturing, are now shifting to their own designs. To remain competitive and become more efficient in a world with limited resources, American and European companies must look to their predecessors from the mid-20th century.
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