How to Understand the World through the Lens of the Global Chip Industry?

I have been tracking the global chip industry since the pandemic days when sudden shortages in chip supplies led to production disruptions across a wide array of products— including but not limited to cars, smartphones, laptops, servers, home appliances, and other electronic items.

Fossil fuel had been the main point of friction in the 20th century, with countries fighting wars and managing diplomatic relationships just to secure undisrupted access to fuel; the focus has shifted, especially owing to the advent of hydraulic fracking, which had catapulted the US as one of the leading oil producers in the early 2000s.

While fossil fuel had played a pivotal role in the 2nd industrial revolution and partially in the 3rd industrial revolution; the 4th industrial revolution has been spearheaded by raw processing power wrought about by increasingly sophisticated chips. Initially, chips were thought of as commodities to be manufactured from the cheapest destinations, particularly in South East Asia, and designed in more developed countries.

Two types of companies emerged, designer firms like UK-based ARM, which specialized in designing chips, and chip manufacturers or fabricators like TSMC, focusing on manufacturing chips. Chip fabrication is a capital-intensive and cost-competitive vocation, requiring the benefits of economies of scale. As a result, production has converged across a few very large manufacturers serving many chip designers. Taiwanese TSMC (59%), UMC (6%), South Korean Samsung (13%), and Chinese SMIC (5%) are the notable players, apart from Intel- a once dominant chip designer and manufacturer- gradually losing market share to Nvidia for AI processors and to AMD in the server segment.

US-China Rivalry and Geopolitical Tension

The geopolitical tension between the US and China has led to attempts to decouple supply chains. The US is grappling with an increasingly ascendant and assertive China and is cognizant of its growing military might. Any potential military conflict between Taiwan and China will likely draw in the US and disrupt existing supply chains, owing to South East Asia’s importance as a major chip supplier.  

The Biden administration has taken an aggressive stance to near-shore chip production through the Chips and Science Act, a USD53 billion fund to bring chip manufacturing on-shore through tax credits and other incentives. The law also stipulates funding of 50 community colleges across 19 states to train potential factory workers. The US government has persuaded TSMC to set up a production facility in the US. While TMSC’s other fabrication plants will be set up in Japan and Germany as a strategy to de-risk from the looming Chinese threat. Unfortunately, most advanced processors will still be manufactured in Taiwan in the coming years.  

While China is a bit part player in the chip fabrication market, it has dominant control over critical raw materials: Germanium and Gallium. The Chinese have already capitalized on their market power, imposing sanctions on the export of Gallium and Germanium, disrupting the supply chain and production of chips.

How does the volatile but increasingly important chip industry impact the world order? What does re-shoring of fabrication away from South East Asia mean for developing countries like Bangladesh?  Firstly, it’s important to keep tracking the shifting tides of chip manufacturing to understand the wind of geopolitical changes. Taiwan’s control over 65% of chip supplies, gives it added importance to the US and might lead to a major military conflict, as China reasserts its claim on the island state. The third world war might potentially originate from attempts to control chip production.

Bangladesh, as a net importer of processors, will adversely be impacted by any supply chain disruption. But, like India, should have concrete plans to attract investments in its nascent chip-designing industry; while aspiring to become a player in chip fabrication in the coming decade.