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Semiconductors In-Depth: The Next Oil?
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Semiconductors In-Depth: The Next Oil?
Market Studies Department
The Semiconductors Shortage
The automotive industry has been facing a shortage of semiconductors since 2020. The reasons behind the ongoing shortage vary, but the most important is the COVID-19 pandemic. It started in 2020 with the automotive original equipment manufacturers (OEMs) cutting demand for chips due to lockdowns in many regions worldwide. Their act reduced automobile demand and ceased car production and sales for weeks. Lockdowns instigated an uptake in demand for laptops, smartphones, and other devices as millions of people needed to work remotely. Accordingly, semiconductors manufacturers, especially TSMC (Taiwan Semiconductors Manufacturing Company), the global market leader, shifted their focus to supply the electronics industry instead of the automotive. When lockdowns were partially relieved in late 2020, demand for automotive surged, overwhelming suppliers and causing difficulties in the supply chain.
Other events contributed to the shortage in 2021-2022. In February, an ice storm in Texas hit key suppliers, e.g., NXP, Infineon, and Samsung. Renesas Japan suffered from a severe fire the following month. During the summer, Malaysia, where most microcontroller units (MCUs) are assembled, imposed a new lockdown. Shanghai also implemented a lockdown during the spring of 2022. Millions of vehicles could not be produced due to the shortage. Several automotive OEMs around the globe had to shut down operations for several weeks. The Russia-Ukraine war in early 2022 and the current USA-China tensions over Taiwan have caused even further disruptions to the supply chain. Consequently, the semiconductor shortage has culminated to an unprecedented level. Since Taiwan is the home of TSMC, the largest semiconductor manufacturer in the world, any escalation around Taiwan will severely impact all modern technology industries, especially automotive.
Why are Semiconductors Important and Who are the Industry Leaders?
Semiconductors are the basis of modern technology with numerous applications, from cell phones to spacecraft. Semiconductor-based technologies, like neurotechnology, quantum, computing, and artificial intelligence, have the potential to change the course
of human history.
The global semiconductor market was worth $600 billion in 2021 and is expected to double by 2030. The industry relies on foundries, a market valued at about $80 billion in 2021. According to IC Insights analysts, foundry sales witnessed an increase of more than 20% year-on-year in 2020 and 2021 and are expected to exceed 20% in 2022. Most semiconductor foundries are in Asia.
Taiwanese TSMC is the market leader by a wide margin, with a 60% share of the overall market. That share reaches 90% for highly advanced chips (<10nm). Other manufacturers include South Korean Samsung (7% market share), Chinese United Microelectronics Corporation (UMC) (8% market share) and SMIC (5% market share), and American Global Foundry (8% market share). Nine of the top 12 foundry manufacturers in 2021 were in the Asia-Pacific region. The fragility of the semiconductors supply chain, geopolitical tensions, and the huge-demand forecast has pushed industrial powers to react and reach the demand level.
Industrial Powers Catching-up
The United States is the birthplace of semiconductors and was once one of the largest producers of semiconductors, with production reaching 40% of global demand 2-3 decades ago. Its chip-making capacities have been eroding and are currently playing catchup. In July 2022, Congress passed the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors), estimated at more than $52 billion. The CHIPS Act includes semiconductor manufacturing grants, research investments, and an investment tax credit for chip manufacturing.
Europe is also planning to catch up via its European Chips Act, proposed by the European Commission. More than $43 billion of policy-driven investment, broadly matched by long-term private investment, will support the Act until 2030.
Japan, the global leader in chip manufacturing once, is also trying to come back. The success of Japan's semiconductor policy is estimated to require an investment of at least $78 billion. In June 2022, the Ministry of Economy, Trade and Industry (METI) announced a $3.5 billion subsidy for constructing an $8.6 billion chip foundry in Kyushu. The factory, expected to start production by the end of 2024, is the first step in Japan's comeback.
A new geopolitical landscape is formed by the efforts of the US, Japan, and their allies. Commercially, the world splits into two camps: the US and its allies (Japan, South Korea, Taiwan, etc.) on the one hand and China, Russia, and their allies on the other. This bipolarity is mostly in the semiconductor industry. “The era where the world is at peace and it doesn't matter who supplies our semiconductors is over," said Kazumi Nishikawa, a director at Japan's METI.
What about the Kingdom?
The Kingdom has faced the impact of the semiconductor supply chain disruptions and the new geopolitical shifts and industrial strategies set by industrial powers like the US and Japan. The local demand for semiconductors is expected to surge from the growth of several sectors, e.g., automotive, aerospace, military, telecommunications, and artificial intelligence, to achieve Vision 2030 goals. The Kingdom could become a regional hub in the Middle East for this industry by taking advantage of its strategic location between Asia and Europe. In the medium to long term, it could balance the global sourcing of semiconductors.
The merits of creating and developing a local semiconductor industry in the Kingdom are countless. First, the economic impact (e.g., GDP growth, trade balance, job creation, and synergies with other sectors) will be forceful. Second, and most importantly, securing the semiconductors supply chain will enable the development of strategic sectors in the Kingdom. The effort requires solving crucial challenges, like obtaining access to chip design (under IP), investing significant CAPEX in factories, reaching mass production, building human resources capabilities, and developing the know-how. The positive signals are promising as the Kingdom establishes programs to head towards the next oil.
Disclaimer: This Report, including data, information, methodologies, and opinions reflected herein contained or is for general information pur- poses only. The material in this Report is obtained from SIDF per dating of the report. SIDF has taken reasonable care to ensure that, and to the best of our knowledge, material information contained herein is in accord- ance with the facts and contains no omission likely to affect its understanding. SIDF makes every effort but cannot and does not represent or warranty of any kind, whether express or implied, as to, the accuracy, reliability, or suitability of the information, products, services, or related graphics in this Report for any purpose. SIDF assumes no liability or responsibility of any kind for any errors or omissions in the content of this Report and further disclaims any liability of any nature for any loss howsoever caused in connection with using this Report. The materials and information in this Report are subject to change at any time without prior notice.
