Are we dependent on semiconductors?

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History has known several oil crises and the ensuing consequences: economic, geopolitical, sociological and even ecological disruptions. In recent months, a new kind of turbulence has shaken the planet, relegating oil to another era: the shortage of semiconductors. Thousands of times thinner than a hair (on the order of a nanometer), these electronic components are omnipresent. We unwittingly use them everywhere, all the time. Factories shut down and the global economy is holding its breath, all sectors suffering the consequences one after the other. Deciphering a hitherto neglected addiction: flea addiction.

The black gold of the 21st century

Technically, semiconductors are solid chemical elements or compounds, neither completely conductors of electricity, nor completely insulators. They can become either under the action of heat, electrical voltage or light. A bit like switches that we open or close. They are usually made from silicon, a derivative of sand that is easily found, but also germanium or gallium. Semiconductors are today our everyday companions, present in almost all devices: smartphones, computers, tablets, game consoles, televisions and other connected objects.

Indispensable to the proper functioning of cars and household appliances, they are used in the manufacturing processes of all industrial sectors (aeronautics, medical, military). In 2020, the global semiconductor industry from design to manufacturing was worth nearly $ 440 billion. Figures that will only increase in the years to come.

Samsung Electronics, the world’s largest electronics group, is a leading chip maker © Samsung

To understand the component crisis which has been going on for several months, it is necessary to take an interest in the structure of the market. Alongside companies like Intel, Samsung or ST Microelectronics, which design and manufacture their chips, many players have chosen to specialize. On the one hand, the designers – mostly American companies like Broadcom, Qualcomm or Nvidia – are only responsible for research and development. They are called fablessbecause they don’t produce the components they design. On the other, the manufacturers. The production of semi-conductors, which is particularly complex, is 80% located in Asia, in Taiwan with TSMC – which holds 50% of the foundry market share – and in South Korea with Samsung Electronics. In summary, those who design and sell the chips often don’t make them.

The semiconductor market is very cyclical and volatile.

Mathilde Aubry

professor of economics at EM Normandie

The multiple reasons for this shortage

“The semiconductor market is very cyclical and unstable, indicates Mathilde Aubry, professor of economics at EM Normandie, in her study Semiconductor shortage: thoughts, solutions and priorities. From the beginning of the 1990s, IC Insights emphasized the alternation of periods when companies’ production capacities increase while prices and investments fall, and periods when these variables move in the opposite direction. “ Cyclical and therefore unstable by nature, this market has experienced some upheavals in recent months which have disrupted it for good.

First, geopolitical tensions between China and the United States, which bear the seeds of the present crisis. Anticipating the sanctions imposed by Donald Trump (and maintained by Joe Biden) on the Middle Empire, the giant Huawei bought immense quantities of semiconductors, widening the inventory deficit from 2020. Then comes the Covid. Surprise for IT specialists, it is accompanied by a demand that explodes with the first confinements, individuals massively equipping themselves with digital communication and leisure means, and companies with servers to ensure teleworking conditions. .

Problem, this demand was badly anticipated by the giants of the sector, who ordered batches of semiconductors based on bad estimates. Other difficulties, epidemic outbreaks, fires, water rationing and frequent power cuts continue to paralyze production lines in Asia here and there. To further complicate matters, Asian ports are saturated, also unable to meet demand. The whole world is ordering containers from China, Taiwan or Vietnam: prices have increased tenfold in a few months and they are piling up at the docks.

Impacts on industry and consumers

Faced with this conjunction of insufficient production capacities and logistical difficulties, the global industry is beginning to suffocate. Since semiconductors are used in the manufacture of countless products, few industries do not suffer the consequences of their scarcity. Starting of course with that of high-tech. Gamers did not wait this fall to see it. Those who have been impatiently awaiting the new Xbox One and Playstation 5 know something about it: already hard to find when they were released a year ago, consoles are now out of stock, with replenishments in dribbles.

Ditto for the latest generation graphics cards. “When we receive stock, everything is sold in a few minutes”, tells us the manager of a site specializing in the sale of computer equipment. As for Apple, which buys nearly 12% of global semiconductor production according to the Gartner firm, the consequences of the shortage are also starting to be felt. The apple giant announced that 10 million copies of its iPhone 13 could not be produced on schedule.

© TSMC

Beyond the IT sector, all sectors of the economy are affected and everywhere products are lacking: household equipment, toys, DIY tools, etc. But it is certainly in the automotive industry that the price to pay is the highest. From windshield wipers to turn signals, cars are indeed encased in semiconductors. Without them, the production lines are on a forced diet. This is precisely what is currently taking place, with manufacturers unable to supply themselves, more and more employees on technical unemployment and, on the whole, a very uncertain future which is emerging for the entire industry. Renault anticipates a production loss of 500,000 vehicles over the coming year, Stellantis (merger of PSA and FCA, which brings together Peugeot, Citroën, Opel, Fiat and Chrylser) has closed several factories like many of its competitors …

Finally, the whole market collapses: in Europe, sales have slumped by 23% in one year and the outlook for the coming months is not very encouraging, the firm AlixPartners anticipating a global shortfall of 210 billion dollars.

Really effective solutions?

This crisis which affects so many sectors is not really surprising. It was even predictable. Already in 2008, a Senate report worried about the weakness of Europe in terms of semiconductor production and warned against the consequences that this could entail. “Is Europe going to give up producing components and specialize in circuit design?” […] such an orientation would ultimately lead to the disappearance of European microelectronics and to the loss of global competitiveness of entire sections of the economy ”, writes Senator Claude Saunier in the report The microelectronics industry: taking the offensive.

We do not decide to produce semiconductors in the same way we decide to produce masks: the adjustment between supply and demand is difficult.

Mathilde Aubry

professor of economics at EM Normandie

“Resume the offensive” seems more necessary than ever to respond to this crisis which is well on its way to last. The projections of experts from all sides do not give any hope of improvement for several quarters. So everyone is working extra hard. Starting with TSMC, the world leader in chips, which announces the construction of a factory in Japan and 100 billion dollars of investments over three years in research and development and improvement of production capacities. Intel is following the same path with the construction of two XXL factories in the United States, which are expected to cost some $ 20 billion.

It is also with billions that Europe intends to reduce its dependence on Asian founders by relocating part of the production on the old continent. Brussels therefore draws its Alliance for processors and semiconductor technologies, with the ambition of increasing its share in world production of components to 20% by 2030. As for France, a budget of 6 billion euros euros is devoted to semiconductors in the France 2030 investment plan. Objective: to double French production.

Will these announcements be enough to restore a normal situation? Nothing is less sure. According to Mathilde Aubry, “When all of the new fabs are up and running, the higher prices we can see right now will have lowered demand. The consequence will then be a new phase of surplus. These factories risk not being profitable, especially since they quickly become obsolete in this sector. We do not decide to produce semiconductors in the same way we decide to produce masks: the adjustment between supply and demand is difficult. “

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