How the Russia-Ukraine War is Altering Global Semiconductor Supply Chains

The Russia-Ukraine conflict continues to disrupt global supply chains, which were already stressed by the Covid-19 pandemic, prompting several nations and organisations to rethink their supply networks.

While the war has hit several industries including agriculture and energy, one of the worst affected is semiconductors as both nations are major exporters of raw materials used in the making of semiconductor chips.

Recently Intel CEO Pat Gelsinger1 warned the semiconductor shortage may be prolonged, extending well into 2024, in turn putting pressure on equipment manufacturing. Semiconductors power everything from smartphones, computers, smart homes, and even automobiles. The world has been facing shortages for these components for a while. In 2021, chip shortages forced practically every major automaker to restrict output, with corporations like General Motors shuttering whole plants2.

Ukraine produces about half of the world’s neon gas, a critical component of lasers that are used in making chips. Ukrainian companies Ingas and Cryoin are among the leading suppliers of neon gas and have had to shut operations due to escalating attacks on key cities of Mariupol and Odesa. One of the major semiconductor importers in the world, Apple, produced 10 million fewer iPhones than expected in 2021, owing to chip shortages3.

  • Short-Term Impact

    For the time being, leading chip companies expect limited supply chain disruption from the Russia-Ukraine conflict. This is confirmed by the Semiconductor Industry Association (SIA), which has stated that given the variety of critical materials and gases used in semiconductor manufacturing, the sudden shortage of neon in chip production is unlikely to cause any major disruptions in the semiconductor manufacturing process for now4.

    That can be attributed to raw material stockpiling and diversified procurement strategies adopted by many companies. Businesses today are better prepared than they were in recent years, owing to other disruptions like the COVID-19 pandemic and other conflicts such as the US-China trade war and the 2014 annexation of Crimea by Russia.

    The US government, meanwhile, has advised the country‚Äôs semiconductor sector to diversify its supply chain in case Russia retaliates against US export restrictions by limiting access to critical raw materials. If a “long war” occurs, the price of “chips” is likely to skyrocket as these basic materials become more difficult to get. Nevertheless, the Semiconductor Industry Association (SIA) is unable to forecast the war’s long-term impact on semiconductor supply.

    • Alternate Sources

      Supplier diversification had been a priority for many chipmakers even before the recent crisis took hold, prompted by the US-China trade war, the pandemic, and Japan’s diplomatic disagreement with South Korea.

      ASML Holding, a major Dutch supplier of neon to chipmakers such as TSMC, Samsung Electronics, and Intel, announced earlier this year that it was exploring other sources of neon5. Global Foundries, a semiconductor manufacturing giant located in the US, and Taiwanese chipmaker United Microelectronics Corp. have made similar moves.

      The recent conflict notwithstanding, geopolitical tensions elsewhere weigh heavily on semiconductor production and supply, especially as almost 75% of the world’s semiconductor manufacturing is now concentrated in East Asia – Japan, South Korea, Taiwan, and mainland China.

      That has raised important questions surrounding strengthening local and regional supply chains. Regional autarky, however, 6 would need an estimated USD900billion to USD1,225 billion in upfront expenditure to fulfil each region’s 2019 consumption levels. Any future growth in domestic consumption would require further capacity investments by each region. That is almost six times the combined research & development and capital expenditures of the whole semiconductor value chain in 2019.

      Along with this initial investment in new capacity, each country or area would have to bear additional operational costs. Even if the industry can rebalance supply and demand and prevent a sustained condition of global overcapacity, overall worldwide manufacturing operating costs would greatly surpass present global supply chain structure levels.

    • To learn more about impact of the Russian-Ukraine war on the Semi-conductor supply chain, stay tuned for our upcoming report exploring the short-term and long-term impact on the sector and emerging alternate strategies.

1https://www.moneycontrol.com/news/technology/intel-ceo-says-semiconductor-shortage-may-now-extend-to-2024-8437701.html
2https://www.nytimes.com/2021/09/02/business/gm-chip-shortage.html
3https://www.bloomberg.com/news/articles/2021-10-12/apple-poised-to-slash-iphone-production-goals-due-to-chip-crunch?sref=YK080Hgh
4https://www.semiconductors.org/sia-statement-on-sanctions-on-russia/
5https://www.reuters.com/technology/asml-seeking-alternative-sources-neon-gas-amid-ukraine-crisis-2022-02-23/
6https://www.semiconductors.org/wp-content/uploads/2021/05/BCG-x-SIA-Strengthening-the-Global-Semiconductor-Value-Chain-April-2021_1.pdf

Subhjit
Subhjeet Vimal
Associate Specialist

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