The Geopolitics of the Global Semiconductor Chip Shortage

This video explores the global shortage of semiconductors, the tiny chips used as the brains for everything from cars to jets to washing machines. While market forces might usually work to bring supply and demand together, the COVID-19 pandemic disrupted typical demand and production of chips. Now, with geopolitical issues highlighting the implications of a global shortage of semiconductor chips, the United States and China are vowing to never again allow a situation like this to occur.    Global demand for semiconductor chips is currently much greater than supply, and because of a lack of excess capacity in the chip industry, buyers, especially in the auto industry, are faced with a shortfall of a component they need to make their products work. In fact, the global auto industry is expected to be one of the hardest hit in the chip shortage. Indeed, because of the limited number of chips available, global automakers are expected to lose some $61 billion in auto sales worldwide. Some, like General Motors, are now prioritizing production of better selling vehicles and temporarily closing plants until semiconductor chip supplies catch up with demand. General Motors has already closed plants in Mexico, Canada, and the United States and may halt production in Brazil as well. The United States has indicated that it sees the shortage as a threat to national security and consequently, will work with allies to ensure a more stable and accessible supply. China also sees the shortage as a risk and has committed to making most of the chips it needs for its factories, infrastructure, and defense industry by 2025. 

Notes: In a year of disruption, it is perhaps not unexpected that the global semiconductor industry has also experienced a certain amount of chaos. Indeed, those responsible for manufacturing semiconductors could claim a feeling of whiplash. Semiconductors are the essential parts of every computerized system. They provide the brains of devices from complex artificial intelligence to seemingly simplistic tasks like releasing car door locks. Demand for semiconductors comes from automakers, from computer makers, from appliance makers, and a host of other industries. It is the auto industry though that is at the heart of the disruption. When the COVID-19 pandemic started, most automakers anticipated slower sales and promptly moved to cancel orders for the semiconductors that have become increasingly central to the operation of their vehicles. When a slowdown in sales failed to materialize, they put in new orders with their suppliers, only to find that in the meantime, chip makers had shifted production to other industries such as laptops and cloud services, industries that were increasing their orders in respond to new demand for their products as the work-from-home movement took hold. 

Now, a year on from the start of the pandemic, the world is experiencing a shortage of semiconductor chips. Moreover, due to capacity limitations, there is little expectation that supply with catch up to demand any time soon. This leaves companies like General Motors in a difficult spot and raises questions as to whether the United States should be prioritizing domestic production of a product that is seemingly essential to everyday life. While automakers certainly played a role in the situation in which they currently find themselves, they are now positioned to take a collective hit of some $61 billion in auto sales. Other industries are facing similar issues. For their part, chip makers are struggling to find ways to increase supply. But expanding the supply of semiconductors requires building new factories, a process that typically takes considerable investment and time. For General Motors, that forecast could have devastating consequences, consequences that could be felt across the world. The automaker is already shuttering operations across North America, temporarily closing plants in the United States, Mexico, and Canada, and Brazil may be next on the list. 

The United States is a leader in semiconductor design, especially for complex chips, yet it relies on foreign production for many of the chips it buys. Many of the world’s more advanced semiconductors are produced in Taiwan where Taiwan Semiconductor Manufacturing Company (TSMC) pumps out millions of chips and in South Korea where Samsung has multiple manufacturing sites. In contrast, just a fraction of the world’s supply are produced in the United States, a country that is responsible for 40 percent of semiconductor sales. With sales of chips up more than six percent in 2020 as compared to 2019, some countries are suggesting that increasing domestic production is necessary to avoid the type of supply chain disruptions currently occurring. China for example, has committed to being self-sufficient in chip production within the next few years. Beijing’s goal is to produce 70 percent of the chips it needs. Newly elected U.S. President Joe Biden has promised to take measures that would prevent a shortage from happening going forward. His plan is to be proactive when it comes to semiconductors rather than reactive. Biden, patently aware of Taiwan’s geographic proximity to China, wants to ensure that semiconductor chips cannot be used as a negotiating tool against the United States. Biden’s commitment to ensuring the integrity of U.S. supplies involves putting the chips under national security policy. For companies like General Motors however, these steps, while promising, will do little to get them out of their current bind, leaving employees and other stakeholders, with few options other than to wait.   

Discussion Questions: 

1. Basic economics suggests that market forces will act to bring supply and demand together. However, in the case of semiconductors, it is looking increasingly likely that countries will intervene in the market to ensure their own policy objectives are met. Discuss the geopolitics of the supply and the demand for advanced semiconductors. How will the policy objectives of the United States and its allies together with China determine the future of advanced semiconductor supplies? What does this mean for the companies that produce chips? How might differing geopolitical agendas impact companies buying chips?   

2. Most automakers have adopted just-in-time inventory and lean manufacturing production strategies, hoping to capitalize on the efficiencies they offer. Now though, with the supply chain for semiconductors in disarray, automakers are being forced to prioritize vehicle production and even temporarily close plants. Discuss the benefits and drawbacks the production strategies used by automakers. Is the greater efficiency achieved using these methods worth the risk of disruption to production? Should automakers be carrying bigger inventories of critical parts that are outsourced to foreign companies? What can automakers learn from the current situation? 

3. Demand for advanced semiconductor chips rose sharply in 2020 as the COVID-19 pandemic changed the way people worked and lived. Consider the global shortage of advanced semiconductor chips from the perspective of chip makers. Why is it so difficult for chip makers to quickly increase capacity to meet growing demand? It is expected that demand for chips will continue to rise as the electric vehicle movement takes hold and cars become more complex in general. In addition, demand for chips is likely to increase as the global population becomes more dependent on products containing ever more complex chips. How should chip makers prepare for this rising demand? Should governments have a role in ensuring that supplies of chips are adequate? Explain.  

Sources: CNBC: GM extends plant shutdowns due to global semiconductor chip shortage, Photo by Jonas Svidras on Unsplash