Chip Shortages in the Light of Geopolitics and Climate Change

By Julian Kamasa
An interplay of disrupted supply chains due to the COVID-19 pandemic, extreme weather events and geopolitical tensions have exposed the fragile networks underpinning the semiconductor industry. Microchips are built in devices such as computers, smartphones cars, solar energy panels, refrigerators or washing machines and are needed to perform essential steering, computing and storage tasks. As these devices are almost indispensable in daily life, a global shortage situation came to be known as “Chipageddon” in spring 2021. While the pandemic is not expected to last forever, extreme weather events and geopolitics are more likely to stay. Worth mentioning here is the complexity of the production process, where weather-related power outages or droughts can have severe consequences on manufacturing capacity. Furthermore, there is China's clearly stated territorial claim—and its willingness to use military force if necessary—over Taiwan, a key location for the global supply of the most advanced microchips.

Geopolitical Power Dynamics
The chip industry is one element in the competition for technological supremacy between China and the United States. Two aspects stand out here, though. Firstly, neither of the two great powers is independent enough to sustain a whole supply chain on its own. The United States currently enjoys a clear advantage in manufacturing capacity, compared to China. This is particularly pronounced in areas such as intellectual property, chip design, manufacturing, and non-wafer materials. China, on the other hand, is the most important supplier of raw materials like silicon needed for manufacturing. In areas such as contract manufacturing, both the United States and China are heavily dependent on Taiwan, South Korea, and Japan. Contract manufacturers, in turn, need machines coming from the Netherlands.

Secondly and as a consequence of this regionally fragmented nature of microchip production, companies from third countries are often pulled into geopolitical competition. Both the United States and China do have the possibility to project power through export controls. Taiwan appears to be a main point of contention here. Due to increased U.S. pressure, the Taiwanese company TSMC has stopped supplying chips to Huawei, for instance. China, on the other hand, considers Taiwan part of mainland China which will inevitably be reintegrated into the People’s Republic. Such geopolitical clashes have the potential to further destabilize fragile supply chains, as Taiwan is home to many contract manufacturers, which have a 65 percent share of the world market.

The Effects of Climate Change
The need for reducing greenhouse emissions has resulted in new forms of mobility, smart homes and grids, and the decarbonization of energy sources. Chips are needed for this transformation as they enable essential controlling and steering functions. A persistent scarcity of chips can slow down the energy transition. On top of this, climate change is increasingly affecting key manufacturing locations. Taiwan is experiencing chronical periods of drought. This impacts not only the general water supply of chip manufacturing sites, but also its power supply running on hydroelectric power. In Texas, an unusual winter storm caused a power outage resulting in shutting down production at semiconductor manufacturing sites completely. Such power outages weigh heavily, since the production process of chips must take place in clean rooms with stable temperature and pure air. Disruptions of any kind render the product unusable. After such a disruption in the manufacturing process, ramping-up capacities in this complex industry is a matter of weeks, not days. In addition, China’s recent shortages in energy supply resulted in decreased capacities in raw materials mining.

The current chip supply crisis, exacerbated by the coronavirus, illustrates the security and policy challenges states can face when resources are scarce and when major chip production sites are the focus of geopolitical disputes. Huge market imbalances caused by the COVID-19 pandemic have shown how crisis-prone the semiconductor industry is. In contrast to other sectors, setting up the entire chip development and manufacturing process takes years, since not only the chip-design has to be planned carefully, but also the production facilities intended for them. Furthermore, during this process future technological development must always be anticipated.

On top of that, companies in the chip industry may have to take geopolitical factors and effects of climate change into account when choosing the location of sites. Politically motivated trade restrictions pose a risk to further destabilize supply chains and can cause uncertainty for involved companies. On the other hand, the race to technological superiority goes hand in hand with increased industrial policy. China, Japan, South Korea, the United States, Taiwan, and most recently the European Union (EU) are all launching subsidy schemes worth billions of dollars to attract world leading chip manufacturers to set up the next production site on their territory. As tempting as this may be for countries involved, building up a state-of-the-art production site can turn out to meet (geo)politically motivated quests for prestige, but not necessarily industrial demands.

Therefore, policy makers would be well-advised to look at what its industry needs in the foreseeable future instead of how much another country is promising to spend. The EU, for example, tends to build its narrative on the ambition to produce the worlds most advanced chips. Such products are, however, needed for high-end electronic devices, which are not produced in the EU and do not address the shortage of chips for the EU’s automotive industry in any way. Every country has different industrial needs and chip shortages have not affected all industrial sectors to the same extent. This means that there is no one-size-fits-all approach to address the current shortage situation, since each region is in a different situation as far as geopolitics, effects of climate change, industrial needs and shortages in supply are concerned. Not taking these factors into account may in fact result in costly industrial policies which would not target the actual causes of chip supply shortages, but aim at a geopolitically motivated competition for prestige instead.
Julian Kamasa is a Senior Researcher at the Center for Security (CSS) at ETH Zurich.

The Strategic Technologies Blog is produced by the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).