What factors have led up to the semiconductor shortage of 2021? And to what extent have geopolitical tensions exacerbated the problem?
Semiconductors are foundational to the modern economy. They truly are the engines of so much critical infrastructure and devices that we use. Our military platforms, almost everything we use daily, either has semiconductors in them, or somehow depend on semiconductors in order to function properly. For that reason, you really can consider them to be more valuable than oil today. That is why there is so much concern over the state of the global supply chain. The fact that there are these shortages means countries are trying to shore up their domestic capabilities because they recognize the strategic value that they have. That strategic value is only going to increase over the course of the next few decades.
We see the United States, Japan, South Korea, the European Union, and China all trying to boost domestic fabrication. They are allocating a lot of funds towards next generation designs and looking for new materials to make semiconductors. It’s a gold rush right now if you’re in the semiconductor industry. It has and will continue to be a fundamental element of the global technology competition. Whoever has access to the best semiconductor technologies will be at the forefront of economic and political power.
Geopolitical tensions have had an impact. The shortage is partly a result of companies hoarding semiconductors due to the uncertainty over whether they’ll be able to access them going forward. The situation has also been exacerbated by the pandemic, which had a massive impact on the global supply chain. It’s been a perfect storm. There was also some poor decision making and long-term planning from certain industry segments. The automotive industry miscalculated when the big rebound in consumer interest would return, and they definitely underestimated the scale of that as well. What’s fascinating is the ripple effects of these shortages, which at first seemed to be limited to the automotive sector, and then spilled out to electronics manufacturers. certain devices that you need to fabricate semiconductors—they’re being delayed now as well. This underscores how tightly intertwined and complex semiconductor supply chains are.
How has the disruption in the production of semiconductors impacted global supply chains?
The current shortage is really just a preview of what a large-scale disruption could look like. Imagine, for example, Taiwan—just because advanced semiconductor fabrication is heavily concentrated on what is ultimately a small island. If that capacity goes away, then you have to make some very difficult trade-offs. If you do have access to semiconductors, where do you use them? Imagine you start prioritizing military systems, what’s the economic impact of that? For consumer-driven economies, this has tremendous second and third order effects. Another issue with the global supply chain is the fact that it is so interlinked.
There is no one country that has all the pieces of the puzzle. There is a company in the Netherlands called ASML—the only producer of the specific type of machine that you need to make the highest end semiconductors. ASML developed a technology called extreme ultraviolet lithography, which is used to make the chips. Imagine something catastrophic happening to that company, then all of a sudden, your capability to buy new equipment, or maintain and repair the existing equipment, could go away overnight. That poses a litany of problems—for everyone. A loss of capability in the Netherlands, or in the U.S, which excels in designing chips, has tremendous ripple effects throughout the entire ecosystem.
Due to their complexity, will we see increased cooperation from the QUAD and G7 countries to strengthen critical supply chains? What have we seen so far? Could this impact tensions that are ongoing with China?
I think the only realistic answer to the supply chain problems that we have is for tech-leading democracies to work more effectively together in addressing these issues. We’re starting to see the opening salvo of that, particularly with the bilateral discussions the United States has had with South Korea and Japan. The QUAD is also an area where the Emerging and Critical Technologies working group is focusing. President Biden will be discussing the Trade and Technology Council with his counterparts in the European Union shortly as well.
Semiconductors will be one of the agenda items that’s going to be discussed. Ultimately, what will need to happen is for all these distinct efforts to become a unified whole. No one single country, or in the case of the EU, group of countries, has all the answers to address this problem. Ultimately, there needs to be a multilateral approach if we’re going to have meaningful change.
Technological leadership appears to be a central aspect within the larger US-China competition we are seeing today. Is there concern that China will use grey-zone tactics to gain an unfair advantage as these two countries work towards developing their respective indigenous semiconductor industries?
Certainly. We’re seeing a lot of grey-zone activity from China, particularly in Taiwan. Taiwan is quite vulnerable to that, given their geographic proximity—there are cultural and linguistic similarities as well. Taiwan is uniquely vulnerable. Given China’s ambitions to indigenize advanced and cutting-edge semiconductor fabrication, Taiwan is a big target. I think most significantly, what we have seen is a lot of IP theft and Chinese attempts to attract engineering talent to the mainland—those are two of the most impactful ones. That is being compounded by other forms of grey-zone activities, such as military intimidation efforts like the frequent incursions of airspace and the exclusive economic zone of Taiwan.
It’s certainly plausible for China to invade Taiwan, even with the specific goal of gaining control of Taiwan’s semiconductor industry, but I do consider it highly unlikely. Grey-zone tactics are a much more likely avenue for China to gain that kind of control. China attempting to control Taiwan’s semiconductor industry by military force is a low-probability, high-impact scenario.
What’s important to understand is that semiconductors are the ground zero of the global technology competition. I cannot understate how critically important this area is, and particularly, how urgent it is that we get these policies right, so that countries like Canada and the United States can remain economically competitive and prosperous.
Martijn Rasser is a Senior Fellow in the Technology and National Security Program at the Center for a New American Security (CNAS).
Prior to joining CNAS, Mr. Rasser served as a senior intelligence officer and analyst at the Central Intelligence Agency, where he worked on foreign emerging technologies, technology innovation, and weapons research & development. He also served as a senior advisor in the Office of the Secretary of Defense, special advisor to a senior military commander in the Middle East, chief counterterrorism liaison to a U.S. military unit in Iraq, and vice chairman of a National Intelligence Council (NIC) working group.
Upon leaving government service, Mr. Rasser served as Chief of Staff at Muddy Waters Capital, an investment research firm focused on investigating business fraud, accounting fraud, and fundamental problems. More recently, Mr. Rasser was Director of Analysis at Kyndi, a venture-backed AI startup in Silicon Valley.