Semiconductors are the building blocks central to driving advancements in everything from smartphones and data centers to cloud computing, autonomous vehicles, and artificial intelligence. The semiconductor industry also sits at the nexus of security and economic development policies.

That being the case, many countries have begun to institute domestic semiconductor research and development/manufacturing funding programs. Aside from the CHIPS Act in the US, Europe has put its own equivalent funding support schemes in place. TSMC, for instance, hopes to build an $11 billion fab in Dresden, Germany, in partnership with Bosch, Infineon Technologies AG and NXP Semiconductors NV. Intel is building out international plants in Israel and Germany. The governments of Japan and South Korea also continue to invest heavily in their domestic chip manufacturing sectors.

There are, however, primary challenges that these programs may not directly address, that need to be taken into consideration, in some form, globally:

– Vendor concentration: The fabless business model has gained ascendancy over the older integrated device manufacturer (IDM) business model and cannot be reversed. The fabless model relies on the availability of a few giant, specialized fabs in Taiwan and South Korea and associated supplier ecosystems, which cannot be readily recreated.

– Advanced packaging, testing, and assembly: A whole ecosystem of companies has been built up in Asia, including in Shenzhen, mainland China. Chips are packaged for devices, assembled into modules for sale or outsourced to brand name systems companies or direct to hyperscalers. This would need to be replicated in other markets to be successful — and much of the work relies on low-cost labor, which is not easily achievable in some locales.

– Additional costs: The current structure of the chip industry, like most manufacturing sectors, is designed to maximize profitability in part by minimizing costs. Having additional capacity that requires subsidy support may raise overall industry expenses or leave excess capacity during future cyclical downturns. Indeed, as examples, TSMC and Intel have already delayed their new fabs in response to the current slow recovery in the sector.

Other factors impacting the semi supply chain include:

– Competition among allies: Europe has put its own equivalent funding support schemes in place, and the governments of Japan and South Korea also continue to invest heavily in their domestic chip manufacturing sectors.

– Mainland China will continue to support its domestic producers, particularly in more mature technologies. There is a new wave of domestic chip companies developing GPUs, including Shanghai Biren Intelligent Technology Co. Ltd. (Biren Technology), Changsha Jingjia Microelectronics Co. Ltd. (Jingjia Micro), Moore Threads Technology Co. Ltd. and Shanghai Tianshu Zhixin Semiconductor Co. Ltd. (Tianshu Zhixin). NVIDIA Corp.'s president and CEO Jensen Huang says he has identified about 50 new GPU or accelerated AI competitors in mainland China.

– Export limitations: There is also concern about the national security guardrails introduced by the US at the end of September 2023. These limit companies who receive CHIPS Act funding from investing in "countries of concern," including mainland China, Iran, Russia and North Korea, which in turn impacts the global ecosystem.

While the industry navigates technological advancements and market shifts, collaboration across various stakeholders, including manufacturers, designers, and suppliers, remains vital. Understanding the intricate processes involved in chip manufacturing, from raw material extraction to advanced packaging techniques, is essential for addressing supply chain vulnerabilities and sustaining industry growth.

As the world's semiconductor supply chains have become increasingly intricate and internationally distributed, S&P Global Market Intelligence's Supply Chain Console research assesses the key factors driving the industry as well as external disruptions, such as climate change and geopolitical tensions.

Tune in to our recent webinar "More than AI: Semiconductor Supply Chains in 2024 and Beyond" as our team of supply chain and technology experts highlights the fragility of these supply chains while providing insight into what must be done to begin alleviating vulnerabilities.