The ubiquitous chip: Rethinking the supply chain

Image: (L-R) Matthew Gerlach and Tom Miedema, investment managers at Walter Scott & Partners The semiconductor chip sits at the centre of a technology war being waged between the US and China. Growing tensions between the two superpowers continue to foster fears in the US and elsewhere over the supply of this vital component of economic activity. This, in tandem with the Covid-19 pandemic disruption, has prompted a global rethink about supply chains, and the threats posed by China from a competitive and security angle. ‘A buyer’s market’: What is behind the fanfare for private equity secondaries? The importance of the silicon chip should not be underestimated. They are central to the functioning of the global economy, being critical components of almost any manufactured product from industrial robots to phones to cars. The development of new frontiers of technology, whether it be AI, biotechnology or 6G, are underpinned by semiconductors. An integrated system, spread across the world The semiconductor industry is probably the most advanced manufacturing process in the world and is the orchestration of the effort of thousands of global companies. Many of these are so specialised that there is only one company able to deliver a specific component or service, with many companies already operating without real competition. A case in point is Dutch company ASML, now the world’s only provider of leading-edge critical lithography tools for the semiconductor industry, with over 80% global market share across all lithography tools. Germany’s Carl Zeiss is preeminent in the field of semiconductor optoelectronics. Japan’s Hoya has a quasi-monopoly in EUV mask blanks, while Switzerland-based VAT Group is the world’s dominant supplier of high-end vacuum sealing technologies. These, and many others, sit in a globally interconnected semiconductor supply chain, the links of which are difficult to unravel. The new ‘great game’ China and Taiwan remain an integral part of this supply chain. In recent years, the relationship between the West and China has been marked by trade disputes, tariffs and counter tariffs, with the US concerned about the perceived competitive threat of an emerging Chinese tech industry. Complicating matters has been the escalation of tensions regarding Taiwan, home of the world’s largest semiconductor fabrication company, Taiwan Semiconductor (TSMC). The focus on intellectual property security and supply chain resilience amid concerns over China, was hammered home in discussions we had with people working in and around Capitol Hill on our recent visit to the US. Stock Spotlight: Ocado avoids FTSE 100 relegation for now but questions remain The enactment of the CHIPS and Science Act of 2022 (CHIPS Act), provides critical manufacturing incentives and research investments to promote the development of the US semiconductor industry and counter potential security and supply chain threats. Export controls are inhibiting the development of the semiconductor industry in China, hobbling memory chip company YMTC, a perceived laggard in global terms, and HiSilicon, the chip design unit of Huawei. The ubiquitous semiconductor chip has become a flashpoint in this ‘great game’ between the West and China, but for one country to become a self-contained semiconductor giant is exceedingly difficult, given the need to replicate every speciality which is an expensive and near-impossible technological challenge. During our trip, we met with Intel, whose sales to China are still material. The company’s message to the US government was to do everything possible to prevent IP leakage to China, but that it was also important to continue to sell to and do business with the country. Mutually assured economic destruction One area that appears to have unanimous agreement is the economic disaster that would arise from a military conflict across the Taiwan Strait which would have dire consequences for the Chinese, US, and the global economy. World Environment Day: 50 years on Cars, aircraft, industrial equipment, smartphone, medical equipment and server production – all chip-dependent businesses – would be decimated. While China’s aggressive stance towards Taiwan makes for uncomfortable watching, the economic and political fallout of an invasion likely mitigates against any Chinese military action. Shifting sands But the ground is shifting, albeit gradually. The road map for the future will see moves towards a supply chain with at least one alternative source for each link in the chain, ideally in an alternative country. The US, Europe, and Japan will likely see a degree of reshoring of trailing-edge and some leading-edge chip manufacturing. Southeast Asia, India and Mexico represent alternatives to China in the supply chain… eventually. The beneficiaries of such changes are companies that can help deliver ‘technological […]

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