Risk and opportunity go hand in hand. Surging demand for microchips is underpinning rapid growth for international semiconductor businesses and suppliers to the sector, but also exposing these organizations to new vulnerabilities. Taking action to mitigate these risks – including exploring insurance solutions – is therefore vital for sustainable growth.
The big picture is certainly exciting – and not only for industry giants such as the U.S.’s Nvidia and Taiwan’s TSMC, who often dominate coverage of the semiconductor sector. Across the whole industry, demand for chips and other devices, which had slowed during the first half of 2023, has bounced back strongly over the past 12 months and is expected to continue to increase.
Drivers for this demand include the rapid growth of artificial intelligence platforms, surging sales of electric vehicles, and the need for chips in a range of other innovations. Research published recently by the consultant McKinsey predicts that the global market for semiconductors could be worth more than $1 trillion by 2030, up from $600 billion in 2021.
However, while such projections should give semiconductor businesses confidence about the outlook for their industry, they also raise important questions. How well prepared are businesses to meet demand? Can they continue to deliver technological advances? Do trends such as the global shift to onshoring increase the risk of late payments and defaults?
Indeed, multiple factors are increasing uncertainty and complicating the strategic decision-making process. Optimism about growth is tempered by anxiety about rising geopolitical tensions, the ongoing race for technology leadership and the danger of overbuilding capacity.
Moreover, change is occurring so rapidly that even the smartest analysts are struggling to make accurate predictions. This is now a multi-scenario world, in which semiconductor companies need to think carefully about how to protect themselves from trade credit and political risks.
This imperative will only strengthen as the industry continues to evolve – in particular, as production begins to ramp up in countries other than Taiwan, where there is now concern about over-reliance and the political tensions with China.
Malaysia, for example, is targeting at least MYR 500 billion ($107 billion) of investment for its semiconductor industry and hopes to position itself as a global manufacturing hub. The Southeast Asian country is already a major player in the sector, accounting for 13% of global testing and packaging, and has attracted multi-billion-dollar investments from leading firms in recent years, including Intel and Infineon. This shift looks set to continue, with many Chinese chip firms looking to diversify outside of China for assembling needs.
Elsewhere, Vietnam is emerging as a notable player in semiconductor supply chains, providing a viable alternative to Taiwan. The Vietnamese government has sought to boost the sector with industry grants, tax breaks and other perks for semiconductor companies investing locally. That has already helped Vietnam to carve out a niche in the final assembly stage of the manufacturing process, adding 6% to the complex global semiconductor production value chain. It is now the third-largest Asian exporter of semiconductors to the U.S., after Malaysia and Taiwan.
Singapore, too, is a credible competitor. In early June, TSMC-backed Vanguard International Semiconductor Corp and Dutch business NXP Semiconductors unveiled plans to build a $7.8 billion chip wafer plant in Singapore with production expected to begin in 2027. It’s a logical step given the determination of global technology companies to reduce their reliance on Taiwan and China by diversifying the locations of their manufacturing bases.
In practice, most large semiconductor businesses recognise the valuable role that insurance solutions can play in helping them to explore growth opportunities while managing downside risk. The majority of the top 20 businesses in the semiconductors industry are already using trade credit insurance (TCI) and political risk insurance (PRI) through local policies or regional and global programs. This is enabling them to expand their businesses, manage open account risk exposure and secure better terms and/or bigger facilities for financing.
Even more protection may now be required, even though there have been no major defaults over the past two or three years. Politically, the escalating international tension – in particular, between China and Taiwan – is increasing risk. On trade credit, the growth of emerging markets, where financial information such as trade history and payment experience is more limited, calls for more flexible and innovative insurance solutions. Supply chain disruption, regulatory changes, and rapid technological advances also contribute to complexity in the semiconductor sector. That adds a further dimension to the risks faced by businesses across the value chain.
The good news is that good-quality insurance remains available despite all these challenges. Appetite to support growth in the semiconductor sector has increased; insurers are now looking at how they can provide more bespoke solutions – for example, syndicated facilities, excess of loss covers, flexible indemnity and top up covers – to cater for the increased need and demand.
These policies could prove crucial to the growth of the semiconductors industry. TCI and PRI offer a means through which leading players can maintain their competitive edge while navigating uncertainty.
If you would like to discuss how trade credit and political risk insurance can help your organization capitalize on opportunities in the semiconductor sector, please get in touch or contact your local WTW representative.
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