Chip industry in a state of constant stress
The semiconductor industry is facing its most significant upheaval since its inception in the 1950s. Speculation on stock markets about when the current cyclical low in the industry ends obscures the fact that this high-tech sector has become a pawn in geopolitics. In an increasingly digitized world, electronic components are gradually replacing oil as the lubricant of the global economy. The growing importance of semiconductors was evident during the recent pandemic when chip shortages due to production disruptions in Asia led to scarcity. This, in turn, put immense pressure on entire industries, particularly Western automakers.
This supply shock prompted Washington and Brussels to take action, as, according to the US industry analysis firm WSTS, Asia (excluding Japan) accounts for over half of the over 500 billion dollars global chip trade (as of 2023) – a figure that is on the rise. The fear of growing dependence on the largest chip contract manufacturers – TSMC in Taiwan and Samsung in South Korea – triggered a subsidy race between the US and the EU, aiming to promote their own locations with substantial amounts of taxpayer money. The reaction to this has taken on gigantic proportions. In the race for chip factories, Seoul announced an investment of around 215 billion euros in the expansion of the future sector with government funding. To put it in perspective: South Korea's industrial program amounts to nearly half of the German federal budget for 2024.
Subsidy race continues
This race will continue for years, as it is about tomorrow's industrial dominance. Chips are strategic key products, turning them into a political tool for established and emerging economic nations to assert their own economic interests. The shift to a multipolar world with multiple competing states accelerates this process, automatically generating tensions, as is evident in the ongoing confrontation between the US and China. A potential return of Donald Trump to the White House after a presumed victory for the lead candidate of the Republican Party could escalate the conflict. The trade war between the two largest economies in the world would likely take on a new dimension, with catastrophic consequences for the global economy in general and the early-cycle chip industry in particular. This is why there is anxiety about the outcome of the US presidential election in the fall.
Another significant risk in this context is an escalating Taiwan crisis. Some chip manufacturers are already preparing for the nightmare scenario of a weeks-long blockade of the small democratic island by the communist regime in Beijing. To fortify against this, some suppliers are replenishing their inventories. In such a case, global supply chains would face another stress test that could surpass anything seen before.
Risk of growing volatility
The semiconductor industry will have to adapt to the reality that these challenges are not exceptions but will become the new normal. Exogenous shocks resulting from political and military conflicts significantly limit the maneuvering room for companies. The once-dominant superpower, the US, is losing influence, and others, especially China, are stepping in to fill the power vacuum. For the chip industry, this means that business predictability becomes more challenging. The disclaimers of publicly traded companies for forecasts will become more extensive. This, in turn, weakens the significance of manufacturers' predictions. It leads to a constant state of stress for the chip industry, increasing the volatility of market valuations. In comparison, cyclical downturns in this capital-intensive, volatile technology sector would be a lesser evil.