Semiconductor Shortages End An Era Of Globalization

One Of The Most Fraught Dynamics In The Globalization Of Semiconductors In Recent Decades Has Been The Overwhelming Allure Of China.

By Eric Schewe

One year since the start of the COVID-19 pandemic, supply and demand in the global economy have both gone haywire. At the beginning of the crisis, there was a panic over the supply of basic necessities, with selfish shoppers hoarding up toilet paper and bottled water. Shortly thereafter, demand vanished for in-person services in restaurants, live entertainment, and retail, leading to massive unemployment that further limited demand. At the same time, consumer spending in general shifted massively towards internet-based services, helping make America’s billionaires 40% richer by January than a year earlier. Amazon’s employment has nearly doubled to address this demand.

Enhanced by the Trump and Biden stimulus payments, these dramatic shifts in demand are leading to new shortages. The most complex goods in short supply today are semiconductor computer chips. The reasons why are not hard to identify. Huge numbers of white collar workers now work from home, spiking demand for new computers, digital webcams, and other devices. They and plenty of others have sought entertainment from new TVs and video game systems. And after a sharp drop in auto sales at the beginning of the pandemic, there has now been an equally sharp uptick in demand. Many public transit commuters have turned to cars and trucks. The shortage of specialized computer chips helping enhance fuel economy, for example, is holding up entire assembly lines of GM trucks—and some won’t have them at all.

With the huge government stimulus needed to combat this crisis, the so-called era of small government and unlimited globalization is truly at an end. President Biden has issued an executive order calling for an investigation into the national manufacturing base and supply chain infrastructure to offset “pandemics and other biological threats, cyber-attacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition.” As the backbone of the high-tech economy, the administration is now pushing to invest $37 billion to support reviving semiconductor manufacturing in the US.

Globalization Vs. Security in Taiwan and China

The history of the semiconductor integrated circuit aka “computer chip” closely traces the transformation of the global economy in the late 20th century. The invention of the transistor in 1947 necessitated huge investments in R&D and a concentration of scientific expertise only possible at an institution like the Bell Labs. Further development of computing technology came as a result of the Cold War—massive government investment in the defense industry and space race. Seeking to protect brand-new, proprietary and very expensive technology, semiconductor companies were vertically integrated. A single company planned, designed, manufactured, packaged, and tested its products. Japanese and European companies sought to compete with American powerhouses on these grounds in mid-century.

But these huge technological leaps transformed the business models of the tech companies as they were prospering. The integrated circuit (IC) logic chip and CPUs that gave birth to the personal computer in the 1980s sent demand soaring beyond the existing manufacturing capacity of the American design firms. Fittingly, new computer telecommunications and inventory techniques helped ease offshoring the manufacture of US-designed IC chips to East Asia.

Reduced government regulations and easing of trade barriers in the US allowed the offshoring trend to accelerate. Ironically enough, it was only countries with strong national regulations and extensive industrial subsidies that were best equipped to do the work US companies wanted done. In the case of semiconductors, Taiwan was the leader in building manufacturing-only “foundries.” Taiwanese TSMC corporation presently holds the largest global market share (28%) of semiconductor manufacturing, followed by another Taiwanese company with a further 13%.

One Of The Most Fraught Dynamics In The Globalization Of Semiconductors In Recent Decades Has Been The Overwhelming Allure Of China. Ming-Chin Monique Chu argued in 2008 that the trend of both US and Taiwanese firms offshoring IC manufacturing work to China was so significant it posed a serious security challenge for all three countries. The US military and Department of Commerce has long maintained more stringent trade controls with China on goods, like semiconductors, considered “dual use” (for both military and civilian applications). It was only in the 2000s that the US and Taiwan permitted the export of silicon fabrication machinery to China, but only at the lower-tech levels and for lower-skilled tasks.

The coordination of this policy is no surprise. America remains the guarantor of Taiwan’s military security as the People’s Republic of China to this day maintains that the island falls under its sovereignty. Yet the semiconductor industry has become so powerful in Taiwan that top management can now basically defy the nationalist politicians of the country by breaking many of the remaining restrictions. This includes secretly sending R&D work to cheaper Chinese experts, hiding ownership structures and even secretly operating certain banned equipment.

Controlling semiconductor technology is still a concern in 2021. Only one Dutch company, ASML, makes the most sophisticated 5 nm extreme ultraviolet photolithography machines. They remain in very short supply. TSMC enjoys the near exclusive use of these machines, while the United States intervened in November 2019 to prevent ASML from selling a machine to China. In this sense, security concerns have always haunted the globalization of the computer chip and are one reason why a few companies still enjoy monopoly-like power over some sectors of the industry.

The Benefit of Social Capital in the Face of Disaster

The coronavirus is only the second cause of a semiconductor shortage in the past decade. For a period of time, the March 11, 2011 Japanese earthquake and tsunami shut down some production lines in Japan. In particular, the Resenas corporation semiconductor factory was heavily damaged. As a supplier to Toyota and Nissan automobile assembly lines, its shortfalls threatened to halt auto production both in Japan and worldwide. George Olcott and Nick Oliver explain Japanese corporations were able to recover quickly from this disaster, despite sophisticated supply chains, because of a national culture of mutual assistance or “social capital.”

There were such strong cultural and social relationships between the management of Resenas and its clients, between 200 and 400 of them sent workers and offered to pay for part of their recovery effort. Moreover, the Japanese Automobile Manufacturer’s Association coordinated relief efforts, prioritizing resources in order to get the assembly lines moving most quickly and equitably across the industry. They also helped educate emergency helpers about the techniques of maintaining a clean room that may have not applied in their own factories. Finally, Resenas was willing to give up protecting confidential research and production information with so many strangers on-site.

Japanese companies pioneered the cost saving just-in-time inventory management and “lean” supply chains in the 1970s and 80s. The rest of the world adopted this technique but did not enjoy the complementary aspects of its collaborative business culture. Olcott and Oliver believe now is the time to incorporate this aspect of planning between business partners in a more uncertain world.

Abandoning “Leanness” for Resilience

Economics and foreign policy think tanks are at present undergoing an intellectual revolution with regards to the costs and benefits of globalization. Until very recently, these institutions generally supported the neoliberal concepts that free markets, low inventories, and reduced government regulation would bring both the greatest profit to companies and greatest social benefit in the long run. In light of the COVID crisis, climate change, and increasing tension with Russia and China, these researchers are now placing the global economy in a more pragmatic geopolitical framework and stressing planning and diplomacy for long-term economic resilience over short-term profits.

The Hague Center for Strategic Studies have laid out the entire range of options for the Netherlands and EU to consider recovering from COVID shortages and preventing similar problems in the future. They believe a degree of “resource nationalism” is once again necessary—considering that countries do not prosper just from GDP or tax revenue, but from having consistent access to the goods that will allow their businesses to keep running. This includes encouraging vertical integration in industries, investing in strategic stockpiling and even reimposing export quotas, tariffs and stronger licensing.

This news was originally published at Daily Jstor.

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