Tiny Titans | Why the Mighty Microchip Is Vulnerable to Disruption

Kate Sun/May 14, 2024

Reading Time: 10 Min.

Due to potential supply chain failure points, businesses worried about time and complexity are at particular risk. For an integrator, this fragility is further highlighted on two fronts: the import of microchips for integration and the export of integrated hardware for deployment to clients around the world. With high innovation in the global semiconductor chip and microchip supply chain, the delicate equilibrium between supply and demand rests precariously within the web of the worldwide supply chain.

To safeguard your supply chain, opt for strategic warehousing around the world for integration and deployment to Data Centers (DC), Point of Presence (PoP), or Beneficial Owner (BO) destinations. This will safeguard your supply network and ensure you are not caught in the throes of a chip shortage.

A single earthquake in Taiwan in 1999 shut down a major science park for just six days. This caused semiconductor chip prices to triple, and major electronics companies saw stock prices plummet in just a month!

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Post-COVID-19, there was an unprecedented global shortage of essential microchips. However, analysts grappled with where the shortages stemmed from. As it played out, it was highlighted that the incredibly nuanced manufacturing and supply process has multiple failure points. These have and continue to have a severe cascading effect on the global supply of semiconductor chips and microchips.

Worried about chip shortages or supply shortages stalling your projects? Our in-depth supply chain expertise helps integrators stay ahead of the curve.

Factors That Highlight the Vulnerable Semiconductor Chip Supply Chain:

Geopolitical Tensions

Regional Concentration and Intellectual Property

Increased Demand and Pace of Supply

Inelastic Supply, Long Lead Times and Cascading Delays

Inelastic Supply and Long Lead Times

What are the Factors That Impact the Semiconductor Value Chain and Result in Limited Supply?

Supply and manufacture of semiconductor chips have been and are throttled by a few key factors, which include historically innate details and newer embryonic details.

Geopolitical Tensions

What this means for you: Global politics are a whirlwind, and import and export regulations can shift as fast. This is especially so for dual-use, in-demand tech gear like semiconductor chips. This creates a minefield for smooth supply chains, as obtaining the chip comes with a lot of compliance risks, potentially leading to stuck shipments. That’s where HS codes, ECCNs, and trade compliance expertise come in. Through our in-country teams, we stay abreast of all political issues and ensure that no changes in regulations impact our clients.

TecEx maintains a team of dedicated regulatory experts who continuously monitor and analyze evolving import and compliance regulations across all our destination markets. This ensures we are up-to-date on industry changes to navigate the complexities of global trade for our clients.

The semiconductor chip shortage is just one symptom of a more significant factor—rising geopolitical tensions.

Countries around the world are competing for control over this critical technology, leading to heightened tensions, trade restrictions, and export controls(link to ECCN piece). This disrupts the smooth flow of chip manufacturing across borders, making it more complex and expensive to produce and deploy the devices we all rely so heavily on.

The world’s chip industry is intricately woven with global politics, especially in the US-China trade war and in localized tensions in Asia – from South Korea to Taiwan. These issues result in trade restrictions and intensified export controls, hindering chip development and supply across nations.

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US-China

Sometimes dubbed the Cold War 2.0, trade restrictions and export controls between the United States (US) and China limit global access to crucial semiconductor chip-making technologies and materials. The US uses export controls to address security concerns relating to potential technology misuse. This has directly resulted in the restricted supply of advanced Nvidia chips to China. These tensions highlight the complex balancing act of export controls, where regulations need to address national security risks while also fostering innovation and economic growth.

Japan-South Korea

Geopolitical issues in this region can have ripple effects throughout the supply chain since both Japan and South Korea are vital players in the chip-making ecosystem. Unfortunately, historical disputes and political tension between these two countries continue to spill over into the economic sphere, constantly posing a threat to microchip production.

The Scramble For Taiwan

Taiwan is a dominant player in the production of microchips, with The Semiconductor Manufacturing Company (TSMC) as a leading global supplier. Consequently, chip production has become a central point of tension in the geopolitical landscape. Drawing on several historical anecdotes, the “Silicon Shield” theory and the scramble to influence Taiwan highlight how these factors contribute to the vulnerability of the global chip supply chain by relying on a single country to hold most of the manufacturing power. But more on that next…

Regional Concentration of Production and IP

What this means: The chip market’s boom brings exciting new players, particularly within the realm of integrators, but navigating the complex global supply chain is demanding. Ensuring a sufficient supply of semiconductor chips and microchips is essential to your business model. Trade compliance specialists are the key to unlocking these opportunities. Move beyond Just-in-Time (JIT) limitations, and consider alternative supply strategies such as strategic stockpiling. Ultimately, this offers integrators the luxury of integration before deployment, which ensures quality control and reliable stocking.

East Asia, particularly Taiwan, dominates semiconductor chip manufacturing. The country produces 60% of the world’s semiconductors. Additionally, The Taiwan Semiconductor Manufacturing Company (TSMC) alone is estimated to manufacture up to 90% of the world’s most advanced semiconductor chips, including Graphics Processing Units (GPUs) for companies like Nvidia.

Some other key players in the region include:

Japan

A historical leader in the industry, Japan boasts some major industry players. The country also excels in chip design, materials, and equipment manufacturing, contributing significantly to the front end of the supply chain.

China

A rapidly growing participant, China is heavily invested in expanding its domestic chip production. While it is still catching up in advanced chip manufacturing, it is a major player in assembly, testing, and packaging (ATP) facilities.

South Korea

Home to household-name tech giants, South Korea is a major force in memory chip production. They are continuously innovating and hold a significant market share.

With production regionally localized to this extent, the supply chain becomes highly vulnerable to disruptions like natural disasters. Consequently, regional dominance necessitates diversification of the global chip production landscape, particularly for critical components like GPUs, to ensure greater supply chain resilience.

To mitigate these risks, governments and companies increasingly invest in building domestic chip manufacturing capabilities. The United States and Europe, for example, pour billions of dollars into subsidies and research initiatives to boost their domestic semiconductor chip production.

This trend is likely to continue in the coming years as countries seek to reduce their reliance on East Asia for critical chip supplies. The expansion of the AI chip market is a significant driver of this trend, as governments recognize the importance of having a domestic supply chain for these specialized processors.

Intellectual Property (IP)

In essence, the concentration of both traditional and data IP restricts the overall output and adaptability of the chip design ecosystem. This concern mirrors the problems with geographic concentration in manufacturing, where a single point of failure can disrupt the entire chip production flow. Just like overdependence on specific manufacturing locations, overreliance on a few IP holders creates vulnerabilities in the whole semiconductor supply chain.

Increased Demand and the Pace of Supply

What this means for you: The possibility of another semiconductor chip shortage is a significant concern, especially for those that rely on a steady supply for integration. Warehousing key components in strategic locations can act as a buffer against potential supply chain disruptions. By strategically warehousing essential chips, integrators can ensure a more consistent flow of materials, minimizing delays and safeguarding the bottom line. Furthermore, warehouses can be utilized to achieve complete integration before deployment. This can streamline the supply chain and be a great value-add to your clients.

The complex and time-consuming nature of chip production further exacerbates the issue, creating a backlog that will take time and significant investment to resolve.

Surge in Demand

The surge in demand for microchips is fueled by various factors converging at once. For example, technological innovation, including AI and IoT advancements, drives the need for powerful chips. Accelerated digitalization across industries further strains global supplies – as demand for more powerful tech ramps up.

Pre-existing Backlog

Even before the current surge, the chip industry faced a production backlog, worsened by the COVID-19 pandemic. For integrators, this backlog was further exacerbated by multiple phases of the supply chain on which they rely – both on the import of chips for integration and the subsequent deployment to markets around the world.

Production Demands

The essence of chip production lies in its microscopic complexity, which increases its vulnerability. It’s a delicate dance—a fusion of miniaturization, intricate processes, cutting-edge equipment, and rigorous quality control. These demands trickle down throughout the supply chain and place strain on suppliers from Original Equipment Manufacturers (OEM) and Integrators to beneficial owners and end-users.

TecEx boasts a strategically located network of established warehouses, enabling you to seamlessly integrate and subsequently deploy your products across your target markets. This comprehensive warehousing solution ensures efficient and reliable support throughout your supply chain.

Inelastic Supply, Long Lead Times, and Cascading Delays

What this means: Chip delays can be a business killer. Stuck in customs, damaged in transit, or hit by production slowdowns – any delay can derail critical deals. Don’t let a single missing component put your business on hold. Opt for liability cover. This financial safety net protects you from losses caused by damaged or lost chips in transit, ensuring your business continues to run smoothly, even when things get bumpy.

To find out more about our liability cover and trade compliance solutions, contact one of our team members.

The current chip shortage isn’t just about surging demand. Two critical factors on the supply side further exacerbate the problem.

The complex and time-consuming nature of chip production further exacerbates the issue, creating a backlog that will take time and significant investment to resolve.

Inelastic Supply

One significant factor further complicating the chip shortage is the inherent inelasticity of supply in the semiconductor chip industry. Unlike other goods where production can be readily adjusted, chip manufacturing is a highly specialized process. Building new fabrication facilities, or “fabs,” requires enormous upfront investments in cutting-edge equipment and specialized environments. This lengthy and expensive process can take months or even years to complete. The inherent inflexibility in quickly scaling up production in response to sudden demand surges creates a significant bottleneck in the supply chain.

Long Lead Times and Cascading Delays

The long and intricate nature of semiconductor manufacture creates a domino effect when disruptions occur. Each stage in the process, from design and fabrication to testing and packaging, has its own lead time, meaning there’s a waiting period between each step.

If a problem arises at any one of these stages, like a material shortage or equipment malfunction, it delays not just that specific step but everything downstream.

This can cause cascading delays throughout the entire supply chain, stretching out lead times even further. In the semiconductor chip industry, this translates to longer wait times for finished microchips, impacting semiconductor manufacturers and consumers alike.

Your Semiconductor Chip Trade Compliance Specialist

International trade regulations shouldn’t hinder your business’s scaling. TecEx simplifies the process, helping you seamlessly integrate semiconductor chips and technology before deployment.

Moreover, we guarantee full compliance with trade regulations across 200+ destinations globally, relieving you of the time and hassle associated with shipping your integrated equipment. Concentrate on your core strengths – growing your business – while TecEx takes care of the intricate aspects of global compliance.

Seamless Integration, Streamlined Export! Eliminate Compliance Headaches with TecEx.

To learn more about how we can help safeguard your supply chain,

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Frequently Asked Questions

What are Semiconductor Chips, and Why Do These Tiny Pieces of High-Value Tech Have Such a Massive Impact on the World?

A semiconductor chip, also called a microchip or integrated circuit (IC), is a tiny brain with enormous utility that powers virtually all modern tech marvels. These semiconductor chips are essential components in everything from smartphones and laptops to cars and medical equipment. However, due to a multitude of factors, these semiconductor chips continue to face major supply chain squeezes.

Why are semiconductor chips crucial for AI?

AI hardware relies on specialized chips called Graphics Processing Units (GPUs) to perform complex computations efficiently. Due to their versatility, GPUs find use in various AI applications, from image recognition to scientific computing. They are a good choice when dealing with diverse AI tasks or when budget is a factor.

Tiny Titans | Why the Mighty Microchip Is Vulnerable to Disruption

Factors That Highlight the Vulnerable Semiconductor Chip Supply Chain:

What are the Factors That Impact the Semiconductor Value Chain and Result in Limited Supply?

Geopolitical Tensions

Regional Concentration of Production and IP

Increased Demand and the Pace of Supply

Surge in Demand

Pre-existing Backlog

Production Demands

Inelastic Supply, Long Lead Times, and Cascading Delays

Inelastic Supply

Long Lead Times and Cascading Delays

Your Semiconductor Chip Trade Compliance Specialist

What are Semiconductor Chips, and Why Do These Tiny Pieces of High-Value Tech Have Such a Massive Impact on the World?

Why are semiconductor chips crucial for AI?

Further Reading

Everything You Need to Know About Return Merchandise Authorization (RMA)

The Chips Act | Shoring Up America’s Semiconductor Supply Chain

Customs Valuation Methodology of Products

Strategically Ship AI Hardware Around the World

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