Chips are Down

by Dave Michels

While the toilet paper shortages last spring were stressful enough, the global chip shortage is a bigger shitstorm. The shortage is impacting graphics cards, CPUs, game consoles, cars and trucks, smartphones, and much more. First, a brief explanation on the cause, and then a bit more about the bigger, impending danger. 

The current shortage will eventually work itself out, but it might take most of this year. Simply stated, the shortage is a result of the pandemic. Surprisingly, chip production doesn’t respond well to a flipped on or off bit. 

The world didn’t have experience with this. After the various global shutdowns a complex synchronized swim routine is required to restart production. Every piece of the supply chain got misaligned — including shipping. The very same pandemic (surprisingly) also caused a surge in demand. Everyone needed new devices for home-based working and entertainment, and for unknown reasons a big chunk of people stuck at home decided to buy a new car (I did). With a little creativity, you can add the trade war as a contributing factor too. 

There’s also the big chip change occurring to Arm processors. Most of the cool tech now is Arm-based processors, and this includes smartphones and AI chips. Apple, Amazon, and Google are all buying custom-designed Arm chips, and there just are not that many places that can make them.

The supply chain is out of whack because of Covid, but its recovery is delayed by other mishaps. The ship blocking the Suez Canal disrupted a busy shipping lane for a week. There was an equipment fire in Japan that closed the Renesas semiconductor factory.  Climate changes are also affecting production. The winter storm in Texas (and its subsequent grid failure) led to Samsung, NXP, and Infineon to temporarily shut down manufacturing of their factories there. Taiwan is facing its worst drought in more than a half century requiring TSMC to truck in water to keep its factories running.

Eventually things will normalize, at least until the next disruption. And there lies my concern. 

The next disruption is more likely to be political. It’s become very clear just how reliant the world is on Taiwan. The US and Taiwan see themselves as allies. The problem is China views Taiwan as a territory. For the most part, this disagreement has been harmless. Every once in a while China does some saber rattling, such as when it demanded Marriott to reprint its hotel map that showed Taiwan as a separate country. The world smiles and nods and then continues to buy chips from (and selling arms to) Taiwan. The last time China and the world had a disagreement about independence was a few months ago in Hong Kong. China clarified its position and that settled that.

China is no doubt confident about things. Its rise in global economic strength is humbling. it has won or is winning the trade war with the US, and no country flinched when China ended Hong Kong’s independence. 

Taiwan makes lots of chips, and TSMC makes the most. These are valuable chips that run the modern world. TSMC is the world’s (and Taiwan’s) largest semiconductor producer. It manufactures chips used in iPhones, F-35 striker jets, and Amazon’s cloud computing systems. TSMC holds a global market share that accounts for 54 percent of total chip manufacturing revenue worldwide. Its technical dominance and leadership is safe for at least the next ten years. It recently announced it is investing $100B over the next three years as chip production becomes more complex (and expensive). For reference, Intel just committed $20B to try to get to where TSMC was years ago. TSMC and Samsung (S. Korea) are the only producers of 10 nm and smaller, the most advanced chips.

I might also mention that the US has been imposing restrictions on how these very chips, produced in Taiwan, can be exported to China. For example, Huawei had to spin out its Honor smartphone brand so that it could keep making products. 

It seems pretty inevitable that China will put its rhetoric into action. Should it opt to exert control over Taiwan it would cause a global economic disruption (not an exaggeration). The US would certainly respond resulting with a nasty and complex situation of super powers fighting over a small island. The casualties of such a conflict would include soldiers, locals, entire economies (global recession), and maybe multiple global tech titans such as Apple. Taiwan could easily become the most valuable pawn in what appears to be a global, zero-sum game of modern society. 

[This post is an extended version of what first appeared in the March Insider Report.]