Taipei, Taiwan – As the war in Eastern Europe shakes global markets, chipmakers seem confident that the already strained industry can withstand conflict-induced disruptions.
Despite concerns over shocks to the supply of material inputs – mainly neon gas and palladium – companies in East Asia and North America are showing resilience. Many semiconductor manufacturers, who supply critical components for electronic devices used in countless industries, have anticipated disruptions and are minimizing the effects either through stockpiling, process innovation or sourcing from new suppliers. .
A lack of exposure to the Russian market also shields the industry from a sudden drop in revenue, although the dispute is expected to hurt the long-term growth prospects of what was a promising upper-middle-income market.
The fog of war obscures other ripple effects that might be lurking around the corner. Yet after operating in a climate of great uncertainty amid trade wars and pandemics in recent years, chipmakers have learned to expect the unexpected and plan for it. The war in Ukraine could be the next step in building the industry’s resilience to crises.
Research firm Techcet sounded the alarm in early February with a report highlighting key materials obtained from Ukraine and Russia, including C4F6, palladium, helium and, chief among them, gas neon, of which the United States imports 90% from Ukraine. The following week, Joe Pasetti, vice president of SEMI, a group of semiconductor suppliers, sent an email to its members warning its members to review supply chains and prepare where they were. more vulnerable.
But when hostilities broke out, major industry players including SK Hynix, United Microelectronics, GlobalFoundries, ASE, Intel and Micron each issued statements assuring investors they could manage the risk.
“The industry learned its lessons in 2014,” Strategy Analytics analyst Sravan Kundojjala told Al Jazeera, referring to Russia’s takeover of Crimea that sparked a 600% spike in gas prices. neon.
The disruption, Kundojjala said, led Dutch company ASML to drastically reduce the amount of neon gas needed in its standard DUV lithography machines by 30-50%.
“Reliance on Russia and Ukraine for materials has diminished over the years,” Mario Morales, an analyst at market research firm IDC, told Al Jazeera.
“However, existing supply constraints and recent logistics and transportation disruptions are keeping the supply chain on high alert,” Morales added, noting that power management integrated circuits (PMICs) and other analog and mixed-signal chips will have less supply chain shock tolerance.
Jeff Ferry, chief economist for the Coalition for a Prosperous America and former industry executive, underscored the importance of greater diversification of supply, saying exploiting alternative sources of materials is more viable. than the re-engineering of processes used by semiconductor vendors like ASML.
Indeed, diversification has helped. ASML said last week that it now sources less than 20% of neon gas from Russia and Ukraine. Micron is also reworking its supplies.
Taiwanese companies also appear to be pivoting.
“Russia and Ukraine are not the only sources of key materials for Taiwanese companies, which also source from other sources such as China,” Trend Force analyst Joanne Chiao told Al Jazeera. based in Taipei.
Chiao said Taiwanese companies generally hold a safe level of inventory as a safeguard measure. South Korea’s SK Hynix has also stocked up in preparation.
Beyond hardware security, chipmakers are also looking to manage their exposure to Russian markets.
$25 billion electronics market
The main concern isn’t so much how economic sanctions will hurt direct semiconductor sales – Russia had little appetite for chips, to begin with, accounting for less than 0.1% of global consumption. Rather, it is the impact of the war on its broader electronic market, valued at $25 billion.
Apple announced it would halt all product sales in Russia days after Ukrainian leaders wrote an open letter to CEO Tim Cook asking him to pull the plug. Although Samsung, the most popular brand in Russia, has not announced its own ban, the South Korean company may have to seek US permission to sell its handsets as its government has been slow to join the sanctions imposed by Washington when the war broke out. .
Questions remain over whether the US Commerce Department will include smartphones – a market valued at $2.8 billion in Russia at the end of last year – among the strategic items sanctioned.
Even if market access can be assured, soaring prices seem to weigh on consumer confidence.
Before Apple announced its ban, Chiao noted that the price of the 128GB iPhone 13 Pro had risen more than 50% since the start of the dispute due to currency fluctuations.
This will lead Russians to spend less on the latest gadgets, she said, and focus on daily necessities, which could lead to a drastic drop in demand for chips. This could prompt IC design companies to reduce their input of wafers to foundries, she said.
Although Russia’s large market potential was underdeveloped, with a growing population and 124 million internet users expected by 2025, it had untapped potential. The conflict will create an unquantifiable loss of potential growth from an emerging market that was entering upper-middle-income country status, a phase that typically boosts electronics consumption.
Now, if 20% of Russia’s gross domestic product is wiped out as some economists predict, it will have major long-term ramifications for the chip industry, especially if the dispute continues, Ferry said.
“In the short term, everything will be fine, but if this war drags on, it could cause us problems,” he said.
Ferry said all consumer chipmakers will feel the effects, though the impact will pale in comparison to the effects of any comparable situation involving China — another military power whose irredentist aggression is sparking fears of war.
Indeed, Taiwan’s TSMC, the world’s largest contract chipmaker, lost bigger Chinese customers than the Russian market and did well, Kundojjala said.
He pointed out that the company lost $4.5 billion in 2020 – about 12% of its total revenue – when the United States banned exports to High Silicon, Huawei’s semiconductor subsidiary. , but demand from other companies quickly absorbed the loss, and TSMC increased revenue by 25%. in 2021.
So while TSMC can live without Russia, it’s unclear if Russia can do the same. Although Taiwan exports few chips to Russia, some have strategic value, such as Elbrus-branded chips, which are designed in Russia and used in the country’s military and cyber technology.
Lack of alternatives
Moscow may struggle to get them made elsewhere anytime soon.
“Although Chinese foundries are able to provide the 1Xnm and more mature process technologies used for the production of Elbrus chips, the redesign and verification processes will take at least a year for these foundries,” Chiao said.
“Therefore, it is difficult for Russia to immediately reallocate Elbrus production to Chinese smelters.”
“SMIC is an option,” Kundojjala said, referring to China’s largest state-owned chipmaker.
Yet because SMIC relies on ASML for lithography and US companies for other critical equipment, they could risk regulatory penalties for violating US sanctions on supplying chips to Russia, which extend to any company that uses American technology in its processes.
With China still dependent on American technology for its chipmaking capacity, it is unlikely to take such a risk for a relatively small customer just yet, Kundojjala said.
That could change if China’s attempts to forge a self-sustaining ecosystem by harnessing carbon chips or other nascent technologies bear fruit.
Such a strategic relocation is what the United States should double down on, according to Ferry. He said American companies must go beyond finding the cheapest destinations and partner with strong and reliable allies, and aggressively dissociate themselves from China, Russia and other hostile states. .
“We recognize that we live in a hostile, unpredictable world… ‘post-neo-liberal world’”.