Research
Understanding the Semiconductor Supply Chain
In the report "Mapping Global Supply Chains – The Case of Semiconductors", we examine the complexities of the global semiconductor supply chain and how interdependencies and market concentration can lead to potential choke points. This article provides an extensive summary of the key report findings.
Producing Semiconductors Is a Complex Global Process
This report aims to provide a clear overview of the complex global production process of semiconductors. In this report, we address the following questions:
To answer these questions, we examine the global production process for semiconductors and the trade flows between countries at different stages of the supply chain. Each production stage requires high levels of investment in R&D and capital expenditures, resulting in a highly specialized global supply chain, where different regions focus on different activities based on their comparative advantages. The interdependencies and market concentration once served the industry quite well, but they have also made the industry more vulnerable to unexpected shocks.
Why Are Semiconductors So Important?
Semiconductors are crucial components of some of the newest technologies, including artificial intelligence, quantum computing, and the Internet of Things. The semiconductor industry is also of strategic importance from a national security perspective, as it is a vital input in the defense industry, especially as technology itself is becoming weaponized.
Figure 1: Several key areas are deeply involved in semiconductor-related trade
How Is the Semiconductor Supply Chain Organized?
Semiconductors are very complex to produce. Before ending up in electronic devices, semiconductors can spend up to half a year going through various production stages, ranging from research to design, front-end manufacturing (wafer fabrication), and back-end manufacturing (assembling, packaging, and testing). Figure 2 maps the entire process. Moreover, a specialized ecosystem of materials, equipment, software design tools, and core intellectual property suppliers supports the whole production process.
Figure 2: The semiconductor supply chain
What Are the Geographic Interlinkages in the Semiconductor Supply Chain?
Since the semiconductor supply chain is geographically concentrated and highly interdependent, international trade statistics reflect how different goods in different production stages flow between different key regions. Figures 3 and 4 show the geographic interdependencies in each stage of the production process. Taiwan and South Korea produce most of the semiconductors, but their ability to produce semiconductors is highly dependent on the supply of raw materials, equipment, and other inputs (such as chemicals and special gases), which come mostly from the US, Europe, and Japan. The Netherlands holds an important position in providing equipment for the production of wafers and semiconductors. The equipment is mostly produced by ASML, a semiconductor manufacturing equipment vendor based there. When the manufacture of semiconductors is completed, a large share is shipped to China, where they are integrated into electronic products for consumers and industries. Finally, China re-exports these electronics to other parts of the world. Research is also critical in this supply chain, but it is more difficult to track than tangible goods. As cooperation plays a significant role in research, we can state that global interdependencies extend beyond the manufacturing process.
Figure 3: Shares of exported goods in the semiconductor supply chain
Figure 4: Shares of imported goods in the semiconductor supply chain
What Factors Have the Potential To Disrupt the Semiconductor Supply Chain?
The complexities and interdependencies of the semiconductor value chain have benefited from a favorable geopolitical environment characterized by rule-based international institutions, liberalized trade policies, and stable trade partnerships. However, recent developments have challenged the supply chain’s resilience. Covid bluntly demonstrated the vulnerability of international supply chains to unexpected events. These disruptions can result in choke points at any place within the supply chain, from logistics to critical raw materials deliveries and the supply of capital and labor. Supply chains are also susceptible to geopolitical risks. The war in Ukraine is a key case in point: Geopolitical motivations were at the heart of the disrupted gas supply to Europe. Semiconductors are also currently at the center of escalating trade tensions and an intensifying technology rivalry between the US and China. Rising geopolitical tensions further contribute to global fragmentation, as pointed out by Christine Lagarde in “Central Banks in a Fragmenting World” and by the International Chamber of Commerce in its 2023 trade report.
How Do Businesses and Governments Strengthen the Resilience of Semiconductor Production?
Due to increasing geopolitical risk, the semiconductor supply chain is shifting. Businesses are diversifying or localizing production, and governments are implementing legislation to safeguard their supply of semiconductors.
Recent policies implemented by the EU and the US to develop and control the production of semiconductors emphasize their strategic importance. However, since the semiconductor production process requires high levels of investment in R&D and capital expenditures, governments’ efforts to strengthen the position of domestic companies in the supply chain will incur high costs.