As one of the world’s most important, sophisticated and complex industries, semiconductors form the backbone of the digital economy and power a vast array of electronic devices. Understanding the trends and risks shaping the industry is crucial for every company that relies on technology. The past few years have given us insight into the substantial disruption that can be caused by chip shortages; for example, due to such events as COVID-19, freeze events, fires and lately the instability of a world facing unclear geopolitical conflicts, business leaders are waking up to pathways that go beyond the balance sheet of any one institution. As public, political and academic awareness on chip shortages grows, policymakers, the semiconductor value chain and end customers are exploring all options to secure production.
The semiconductor industry is increasingly classified as a critical national infrastructure industry by governments around the world due to the reliance on chips. To secure supply chains, policy initiatives made up of multibillion-dollar investment packages have been announced to support onshoring chip production. Examples include the U.S. CHIPS and Science Act and the European Union Chips Act, encouraging semiconductor businesses to establish new production bases, as well as China’s Integrated Circuit Industry Investment Fund, seeking to increase China’s economic self-sufficiency.
While these global efforts have not yet taken effect, they are the first steps toward strengthening regional and national resilience against future crises. In some cases, companies have responded with statements of intent to accept these offers. The potential changes may reshape future centers of semiconductor excellence and manufacturing and may disrupt the industry’s delicate collaboration process that it relies on; this is a complex goal given the industry has grown through a business model of sharing the load (Figure 1).
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Ingots are formed from pure silicon and then sliced into wafers
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Semiconductor designs are created using highly sophisticated computerand software design tools.
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Semiconductor machinery is sold to producers for front-end and back-end manufacturing.
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Semiconductors are created o silicon wafers using various processes and techniques (e.g. etching, photolithography, materials depositing)
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Semi-conductors are cut out of the wafers, tested, encapsulated into plastic packages and prepared for purchase
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Finished semoconductors are sold, typically to downstream electronic product manufacturers, and incorporated into electronic products
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Final electronic products with semiconductors inside are sold to consumers
Chip production happens through multiple companies across the world, each specializing in one or more steps of the process, making up the supply chain. This has created resilience and efficiency, allowing companies to focus on their specialization. Specialization has led to industry sales totaling $526.8 billion in 2023[5] within the estimated $2.2 trillion electronics sector.[6]
Technology and market growth has concentrated cutting-edge semiconductor manufacturing capabilities among a handful of companies located in global hotspots, including China, the U.S., South Korea and — most importantly — Taiwan.
What’s important to remember, however, is that no country is independent enough to sustain the whole semiconductor supply chain on its own. Semiconductor firms, prompted by political and regulatory requirements, are increasingly looking for their suppliers (and their suppliers’ suppliers) to manufacture components on their own shores to reduce their supply chain exposure.
The U.S. currently enjoys a clear advantage in manufacturing capacity compared with China and particularly so in areas such as intellectual property, chip design, manufacturing and non-wafer materials. China, on the other hand, is the key supplier of raw materials, such as silicon needed for manufacturing. In other key areas, such as contract manufacturing, both the U.S. and China depend heavily on Taiwan, South Korea and Japan. Contract manufacturers, in turn, need capital equipment, with one of the most prominent companies located in the Netherlands.
Geopolitical tensions and national security concerns are also pushing countries to explore ways of enticing semiconductor companies to onshore more parts of the value chain and to establish bases to help protect intellectual property. This is a significant commitment of resources.
Industry estimates suggest each chip factory takes a minimum of $10 billion and five years to build,[7] from breaking ground to production of chips.
While investment in new manufacturing fabrication plants will be welcomed by the industry, its impact will be limited if steps are not taken to address labor shortages as well. Estimates in the U.S. suggest that companies across industries will face a shortfall of 67,000 unfilled jobs by 2030. This includes 26,400 technicians, 27,300 engineers and 13,400 computer scientists.[8]
Amid intense competition, semiconductor companies are finding it harder than ever to attract and retain personnel. As semiconductors become ever more critical to product differentiation, some electronics companies, automotive manufacturers and other fast-growth companies are beginning to move chip design in-house.
These moves are making competition for already scarce semiconductor talent even tougher than usual and have the potential to undermine semiconductor companies’ expansion plans.
Simultaneously, as chip design is becoming more and more complex, this will require a different type of talent and more labor — especially for some of the latest and smaller generations of chips where the manufacturing process is complicated.
Changes in supply and demand require new ways to manage future risk.
Semiconductor companies we spoke to told us that they are not only considering the challenges of meeting demand right now but also facing a significant future risk.
To plan for this, several manufacturers have been looking at new ways to manage product supply, such as additional storage of components and raw material and staged supply. Several semiconductor businesses we spoke to are also planning for better re-tooling (recycling up or down) of older technology/equipment, potentially giving manufacturers a quicker response.
“We’ve learned [from industry leaders] that their concerns extend beyond current demand to potential future risks...If they invest in capacity to meet shortages today, will they be selling into a glut tomorrow? …Today’s supply shortfall, and the high costs needed to address it, make it imperative to chart a careful course.”
George Haitsch | TMT Industry Leader, WTW
Governments and businesses need to think beyond single risks and solutions and instead be ready for multiple scenarios, which enables them to be reactive when the exact situation doesn’t unfold as scripted. There are actions organizations can take now to embolden their stance and boost their preparedness for geopolitical risks:
