The resilience myth: fatal flaws in the push to secure chip supply chains


In the sweltering Asia summertime of mid-June, Taiwan Semiconductor Manufacturing Co urgently dispatched a crew to Japan to go to a few of the firm’s tools suppliers. Why, it needed to know, have been these corporations saying they might not ship important machines on time? TSMC is the world’s largest chip producer, and its suppliers had at all times bent over backward to present what the highly effective firm was demanding however, for the first time, it was being met with apologetic messages.

The state of affairs was extremely delicate. TSMC is in the midst of a $100bn enlargement, spurred on by governments in the wake of final 12 months’s alarming shortages of essential chips. But the Taiwanese large has discovered its personal supply chains to be tormented by bottlenecks, affecting gadgets that vary from lenses so exact they might focus a laser beam on a pingpong ball on the moon, to apparently mundane valves and tubes.

The June mission adopted on the heels of the same journey by the firm’s supply chain administration chief, JK Lin, and a job power to the US in March, to examine why the chipmaking machines TSMC ordered there have been taking over to 18 months to flip up.

In Japan, suppliers together with Tokyo Electron, the nation’s largest chipmaking tools producer, and Screen Semiconductor Solutions informed TSMC they may miss even the elongated supply instances they’ve promised, sources accustomed to the tough conferences informed Nikkei Asia.

Screen — one among the few corporations in the world making the chemical cleansing machines which might be important in chipmaking crops — reeled off a listing of obscure parts that it was having bother securing from its personal supply chain. Valves, tubes, pumps and containers product of particular plastics — all are in brief supply.

The issues are cascading from provider to provider and making it laborious to resolve the international scarcity of chips, the hearts and brains that energy digital units from PCs and smartphones to cars.

The difficulties underscore a sequence of inconvenient truths, not only for TSMC and its rivals and suppliers, however for policymakers round the world. Amid US-China trade tensions and pandemic disruptions, governments in China, the US, Europe and elsewhere have decided to “onshore” semiconductor manufacturing. So-called supply chain resilience has turn into a central intention of coverage. But such resilience is a fantasy.

These new nationwide efforts are backed by enormous subsidies and state-backed investments. The US Senate at the finish of July accredited the $52bn CHIPS Act. Japan’s authorities will again TSMC to the tune of ¥476bn ($3.5bn) to construct a manufacturing unit there for the first time.

The bother is these efforts contact solely the seen finish of the semiconductor supply chain. Behind chip manufacturing sits a community supplying tools and different gadgets encompassing tons of of uncooked supplies, chemical substances, consumable components, gases and metals with out which the bogglingly exact means of chipmaking couldn’t perform. China is directing a mixed Rmb1.5tn ($221bn) of private and non-private investments to replicate a chip supply chain inside its personal borders, with modest outcomes to date.

Some of the advanced parts and machines wanted for chipmaking. From high left, clockwise: High-precision ball screws, an EUV illumination system by Zeiss, an ultra-high purity gasoline cylinder valve by Rotarex, a wafer sorting machine by Infineon Technologies. © Photos by Getty Images and courtesy of Zeiss

While a globalised semiconductor trade used to run easily throughout dozens of nations, the effort to replicate this structure inside single nations or areas has revealed and exacerbated bottlenecks in the supply chain, in accordance to Nikkei Asia’s investigations and interviews with greater than two dozen senior trade executives from the main chip economies of the US, EU, Taiwan and Japan over the previous 5 months. At the identical time, there are questions over the long-term knowledge of the coverage, and fears about whether or not, if they are often gotten up and operating, many of those factories would possibly finally sit idle.

JT Hsu, head of semiconductors and supplies at Boston Consulting Group, mentioned even a purpose of reaching 70 to 80 per cent self-reliance is “extremely tough . . . It could be extremely challenging for any country or region to get all the fronts covered.”

This article is from Nikkei Asia, a world publication with a uniquely Asian perspective on politics, the economic system, enterprise and worldwide affairs. Our personal correspondents and outdoors commentators from round the world share their views on Asia, whereas our Asia300 part gives in-depth protection of 300 of the greatest and fastest-growing listed corporations from 11 economies outdoors Japan.

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“It’s not only the [factories] that manufacture the chips but it’s everything that goes in there,” mentioned Jens Liebermann, vice-president of semiconductor supplies at the digital supplies enterprise unit of BASF, the German chemical group. “All the materials, chemicals, gases and their raw materials. All have to be there. It comes down to, where is the source, where is the raw material, where is the manufacturing, and who can handle the logistics?”

Morris Chang, an elder statesman of the semiconductor trade who based and previously chaired TSMC, put it most bluntly in remarks addressed to the US.

“If you want to re-establish a complete semiconductor supply chain in the US, you will not find it as a possible task,” he mentioned at an trade discussion board final 12 months. “Even after you spend hundreds of billions of dollars, you will still find the supply chain to be incomplete, and you will find that it will be very high cost, much higher cost than what you currently have.”

Bottlenecks upstream

Despite how insignificant they may sound, these valves, tubes, pipes, pumps and containers are a case research in complexity — and they’re driving executives mad.

“I am not kidding! We are still receiving valves and tubes that we ordered more than a year ago,” one government with a Taiwanese provider to TSMC informed Nikkei. “When opening the box, we are often very shocked. The box might contain only 10 pieces out of a 100-piece order.”

The unexpected components holding up the chip supply chain

With solely a handful of specialist suppliers ready to meet anti-contamination requirements and cope with the crimson tape of producing gadgets that even have potential navy use, it has been no simple job to enhance capability, particularly with restricted provides of the uncooked supplies behind them.

These gadgets are product of particular plastics known as fluoropolymers and are indispensable to the dealing with of corrosive chemical substances and ultrapurified water that flows in all chip manufacturing services and chipmaking machines, the place requirements hold going up and up.

The most superior chips, these used to construct the newest iPhone and MacBook processors, for instance, at the moment are at the 5-nm stage. Nanometre measurement refers to the line width between transistors on a chip. A nanometre is roughly 1/100,000 of the thickness of a chunk of paper or human hair. The smaller the nanometre measurement, the extra cutting-edge and highly effective the chips are, and thus more difficult to develop and produce. In flip, chipmakers want to place billions of transistors on a chip. The tolerance for a defect or microcontamination is extraordinarily low.

“The size of a Covid virus is about 100 nm,” Kevin Gorman, senior vice-president of built-in supply chain transformation with Merck Electronics of Germany, informed Nikkei. “You can then see how refined the chip manufacturing work is and why all the materials are critical.”

When it comes to semiconductor-grade valves and tubes for dealing with chemical substances, it’s essential they don’t turn into a supply of contamination. Only a couple of suppliers worldwide have the functionality to attain the exacting necessities, in accordance to Nikkei Asia analysis. CKD and Advance Electric of Japan and Entegris of the US, are certified suppliers of valves; Iwaki of Japan is the dominant provider for chemical-handling pumps; trade sources referred to Agru of Austria and Georg Fischer of Switzerland as important suppliers of the crucial piping techniques for chip crops.

Employees in cleanroom ‘bunny suits’ working at Intel’s D1X factory in Hillsboro, Oregon
There are tons of of chemical substances concerned in semiconductor manufacturing. In order to forestall contamination, they’re dealt with in clear rooms, like this one from Intel’s manufacturing unit in Oregon, US © Intel Corporation

The Wassenaar Arrangement, a multinational settlement signed by greater than 40 nations to keep away from such parts being shipped to rogue states for navy use, provides crimson tape that gives one other barrier to new entrants.

Follow the supply chain upstream, and additional chokepoints emerge with regard to the fluoropolymers from which these parts are made. One such materials, generally known as PFA, is barely provided by Chemours of the US and Daikin Industries of Japan. It requires intensive knowhow to course of, and no rivals are on the horizon.

Other key fluoropolymer materials makers embody Solvay of Belgium, 3M of the US, Gujarat Fluorochemicals of India and HaloPolymer of Russia. But not all of them are certified to construct semiconductor-grade supplies they usually should supply to a variety of different industries past the tech sector. Sources from Russia have dropped away due to the disruption and sanctions brought on by its battle in Ukraine.

Hsu Chun-yuan, chief enterprise growth officer of United Integrated Services, a number one cleanroom builder for TSMC and rival chipmaker Micron Technology, informed Nikkei that “sources of fluoropolymers are constrained” and there have been “demand hikes from both the chip and battery industries, driven by the electric vehicle boom”.

And additional upstream nonetheless? Fluoropolymers are processed from fluorspar, also referred to as fluorite, a mineral of which China controls practically 60 per cent of the international manufacturing output, in accordance to information from market analysis firm IndexBox. China has lengthy recognized fluorspar as a strategic useful resource and again in the late Nineties restricted exports due to its significance to industries from agriculture, electronics and prescribed drugs to aviation, house and defence. The mineral is commonly labelled as a “semi-rare earth”.

Little-known fluoroplastics are essential to chipmaking: where do they come from?

According to IndexBox, Mexico is the second-largest producer of fluorspar with about 10.8 per cent of the market final 12 months, adopted by Mongolia and South Africa. In Europe, Bulgaria and Spain collectively management some 5 per cent of the international market. In a supply chain evaluate paper printed by the White House in 2021, the US flagged the dangers of crucial supplies topic to international domination and recognized fluorspar as one in a listing of “shortfall strategic and critical materials”. The report didn’t level out its deep hyperlink with the chipmaking trade. It mentioned growing sources of crucial minerals, strengthening stockpiles, and ramping up North American manufacturing, processing, and recycling capability might end result in fewer disruptions throughout “future worldwide crises”.

Similar points come up in the dealing with of gases resembling neon, used in lithography, and C4F6, a fluorine gasoline used in etching. Both rely both Ukraine or Russia as a significant supply of supply, which has been disrupted by the battle. The tools for transferring them round can also be extremely specialised.

Only a handful of corporations — together with Rotarex of Luxembourg and BBB Neriki Valve and Hamai Industries of Japan — are certified to supply the extremely excessive purity valves for the gasoline cylinders that the semiconductor trade makes use of, Nikkei Asia supply chain checks present. Rotarex controls shut to 80 per cent of the market and solely produces these particular gadgets in Luxembourg.

The valves, constructed with stainless-steel and different alloys, should endure intensive verification processes and want to be authorities licensed due to the risks of leaks and explosions. It would take “10 to 20 years” for a brand new entrant to meet the requirements and assessments of various authorities authorities for certification, some trade executives informed Nikkei.

Trade rigidity, pandemic and battle

The name for chip supply chain resilience emerged amid the US-China tech battle when former US president Donald Trump’s administration clamped down on Chinese tech champion Huawei Technologies in 2019 and blocked its use of American applied sciences, particularly chips, citing nationwide safety. The drastic transfer spurred an aggressive nationwide Chinese marketing campaign throughout sectors to lower dependence on the US and construct a secure, self-controllable supply chain.

The self-sufficiency motion advanced into a world marketing campaign in late 2020, as unprecedented chip shortages stalled automotive manufacturing and harm a variety of industries, crimping international financial development and threatening jobs. The US Department of Commerce mentioned the shortages wiped an estimated $240bn off the nation’s gross home product in 2021. The vehicle trade alone made 7.7mn fewer vehicles than the 12 months earlier than.

The Ukraine battle has additional amplified calls for for supply chain safety. The battle drove up costs of power, metals, chemical substances and essential gases that many chip-related suppliers wanted. It additionally elevated the sense of urgency.

For most main economies, chips are important for constructing every little thing from computer systems and information centres to home equipment and vehicles. They are central to the battle for supremacy in house, science, synthetic intelligence and EVs, and can be essential to the navy and defence tools of the future. Advanced chips are integral to an array of crucial nationwide safety capabilities “including sophisticated weapons systems such as the Javelin antitank missiles the US is supplying to Ukraine to defend itself against Putin’s invasion”, the US Department of Commerce identified in a current report.

Governments to date have promised to pour greater than $100bn into subsidising the constructing of native chip supply chains. As properly as the US CHIPS Act, the EU adopted the €45bn ($46bn) European Chips Act, Japan had budgeted ¥600bn and India arrange a $30bn funding programme for semiconductors and different tech sectors.

The big chip race

Major chipmakers from Intel, Micron and Texas Instruments in the US to TSMC and South Korea’s Samsung Electronics have individually introduced greater than $650bn in investments. These embody a number of outdoors their house bases. TSMC is constructing in the US and Japan, Intel plans to increase in Europe and south-east Asia, and Samsung has building plans in the US. According to SEMI’s estimate, some 91 new chip crops are set to go browsing worldwide from 2020 via 2024.

When the European Chips Act was enacted earlier this 12 months, European Commission president Ursula von der Leyen acknowledged that “no country — and even no continent — can be entirely self-sufficient”. The hope is that components of the supply chain that can not be introduced onshore will a minimum of run via pleasant nations.

“Europe will always work to keep global markets open and to keep them connected. This is in the world’s interest; it is in our own interest, too,” she mentioned. “Europe will build partnerships on chips with like-minded partners, for example the United States or for example Japan. It is about balanced interdependencies and it is about reliability.”

US Treasury secretary Janet Yellen has floated “friendshoring” as a compromise idea. “We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage,” she mentioned in April. “Let’s build on and deepen economic integration and the efficiencies it brings, on terms that work better for American workers. And let’s do it with the countries we know we can count on.”

Major investments by top chipmakers

Russia’s fall from western favour demonstrates that alliances can shift over time and spats can emerge even between nations ostensibly dedicated to free trade.

Japan restricted the export of photoresists, an important chipmaking chemical dominated by Japanese suppliers, to South Korea throughout a Tokyo-Seoul trade battle in 2019.

An evaluation by BCG suggests there are a minimum of 50 chokepoints in the semiconductor supply chain throughout design instruments, manufacturing, packaging, supplies and tools. These factors are outlined as areas the place 65 per cent or extra of a specific merchandise is concentrated in a single nation or area.

The US dominates chip design instruments and a minimum of 23 kinds of important tools, it discovered. Japan is a pacesetter in the manufacturing and important formulation of crucial supplies that embody wafers in addition to photoresists. Europe is the chief in industrial gasoline.

The excessive ultraviolet (EUV) lithography machine solely constructed by ASML of the Netherlands gives a major instance of how tough it’s to swap a part in the chip supply chain. Sometimes it’s simply not possible to discover alternate options.

The EUV machine is indispensable in the manufacturing of cutting-edge chips of seven nm and beneath, serving to mission the difficult patterns of built-in circuits on a microscale. Production delays are hampering the capability to add new capability, lengthening the present chip crunch and setting again the introduction of extra cutting-edge chips.

Trainees at ASML Holding in Tainan, Taiwan
Trainees at ASML Holding in Tainan, Taiwan be taught to construct and function an EUV machine © Cheng Ting-Fang

ASML has prolonged the ready time for a number of fashions to two years due to constraints on important components together with optical mirrors and lenses, folks accustomed to the matter informed Nikkei. An organization spokesperson acknowledged some delays and mentioned constraints on the trade have been “very diverse and across multiple tier suppliers”.

Creating EUV mild inside a vacuum chamber inside a machine is exceptionally difficult, counting on Germany’s Trumpf for a robust laser supply and one other German accomplice, the optics specialist Zeiss Group, for a system of mirrors to replicate and direct the mild.

Since even the smallest irregularities trigger aberrations, Zeiss boasts that its product is the world’s “most precise” mirror. “If one of these EUV mirrors were to redirect a laser beam and aim it at the moon, it would be able to hit a pingpong ball on the moon’s surface,” CEO Andreas Pecher informed Nikkei. Zeiss and ASML have been working collectively for practically 30 years.

Even if ASML desires to strengthen its personal supply chain resilience and appears for different optical companions, it is going to require a minimum of 5 to 10 years of co-development work earlier than getting preliminary outcomes, a number of executives informed Nikkei.

“Actually it’s almost not replaceable in the many years to come,” Nikkei heard from one government at a Japanese lens maker.

There is sort of no a part of the chipmaking course of that doesn’t require deep specialisation and no a part of the supply chain that may be merely and rapidly duplicated.

An employee works at a machine for structure inspection and quality control of 300-millimeter wafers in the production of semiconductor chips on the production line at the Bosch semiconductor plant in Dresden, eastern Germany
Complex machines are required at each stage of the chipmaking course of. This is a machine used for checking wafer constructions, at a Bosch semiconductor manufacturing unit in Germany © Jens Schlueter/Getty Images

Chemicals and solvents used in chip crops want to attain the so-called part-per-trillion (PPT) grade — one particle to 1tn drops. Gases want to attain a purity of up to 99.9999 per cent — the so-called 6N — when it comes to cutting-edge chip manufacturing. For silicon wafers, the primary substrate supplies that chips are fabricated on, all want to be as pure as 9N, or 99.9999999 per cent, an government with the chip materials distributor Wah Lee Industrial informed Nikkei.

“If you want a resilient chip supply chain, you not only need chip plants, you also need a whole string of suppliers from critical chemicals and precision components all coming along,” mentioned an government at Japan’s Daikin. “Building a semiconductor plant takes several years, but building chemical plants will take even longer given the extensive environmental assessments and regulations for handling chemicals.”

The lengthy street to onshoring

China’s efforts reveal that the sensible issue of constructing a chip supply chain can’t be overcome by throwing billions of {dollars} into the effort. As early as 2014, Beijing launched the first section of the China Integrated Circuit Industry Investment Fund, nicknamed the Big Fund, with Rmb138.7bn. Another Rmb204bn adopted in 2019. The first nationwide seed fund stimulated greater than Rmb500bn of funding from the non-public sector and native governments; the second section of the fund is anticipated to encourage an additional Rmb1tn.

China certainly elevated native chip manufacturing — to 16.7 per cent of its home wants in 2021 from 12.7 per cent a decade earlier than, IC Insights information present.

The mathematical implication of getting many nations creating new onshore chip supply chains is that capability goes to be a lot better than the world as a complete really wants.

The trade has indicated that these are sometimes noneconomic funding plans by saying that, in many instances, factories will solely be constructed if they’re closely subsidised. With shopper spending on electronics apparently slowing sharply and recession speak in the air, the outlook for precise chip demand, a minimum of in the brief time period, is instantly unsure.

An aerial shot of TSMC’s semiconductor factory under construction in Kumamoto, Japan
TSMC is at the moment establishing a brand new semiconductor manufacturing unit in Kumamoto, Japan. This aerial shot reveals the building web site on July 22 © Shinya Sawai

Gorman of Merck Electronics acknowledged questions on whether or not native crops might attain financial scale, however mentioned it nonetheless is smart to localise if its key prospects might collectively shoulder the dangers.

“Keeping the supply line short is also better for our environment,” he informed Nikkei. “Our customers . . . will favour a local supply over one that has to cross international borders.”

Building an onshore chip supply chain is a “very large-scale and long-term journey”, BASF’s Liebermann informed Nikkei. “It will take a lot of time and a lot of costs and the cost will only be justified if the utilisation rates of those new plants are meeting the demand, and the demand is high enough.”

Most trade executives imagine a long-term enhance in chip demand is locked in, no matter the present financial surroundings, as on a regular basis gadgets turn into extra related and complicated and as vehicles go electrical and, finally, autonomous. A semiconductor trade that had revenues of practically $600bn in 2021 is broadly projected to be at $1tn by 2030.

“If we really believe that the industry will be reaching $1tn . . . we should be able to have some level of regionalisation of the manufacturing and have the right leverage,” Bertrand Loy, CEO of Entegris, informed Nikkei. “But we won’t be able to have manufacturing everywhere and get the right leverage. We are investing in some countries, some products, but not in all countries for all products because we cannot afford [to do] that.”

ASML believes regional investments “can coexist, if connected to a global ecosystem”, its spokesperson mentioned. “Compartmentalisation leads to sub-optimisation, which leads to higher cost and slower innovation for consumers and companies and governments who rely on this innovation.”

‘No longer an era of free trade’

Simon HH Wu, president of San Fu Chemical, a Taiwanese chipmaking chemical provider, reckons geopolitical conflicts and trade boundaries are prevailing over globalisation, upon which the chip trade was constructed. “It’s no longer an era of free trade,” he informed Nikkei, warning that policymakers and the trade must be beneath no illusions about the difficulties forward.

An employee arranges Apple iPhones as customer shop at the Apple Store
Shortening the lead time on digital shopper items resembling iPhones will depend on making the chip supply chain extra resilient © Mike Segar/Reuters

“Any country that controls certain natural resources or key technologies would want to protect and leverage those resources for economic and political benefits,” Wu mentioned. “What companies could do is to look for allies and partners to alleviate the potential disruptions.

“There’s always something you need to import and ship from another place, country or even continent. If you don’t have phosphate rock how do you produce chipmaking phosphoric acid? If you don’t have fluorspar, how do you produce fluoropolymers? At the end of the day, you can’t move all those mines and natural resources . . . next door.”

JT Hsu, the head of semiconductors and supplies at BCG, mentioned the chip crunch reveals it’s about time to construct some “redundant” capability to give the trade a buffer to take up shocks. “However,” he mentioned, “it’s nearly impossible and unrealistic that any country or region could reach a point of 100 per cent self-reliance, in terms of making everything about chips from the start to the end. That’s not possible now and that is not likely to be possible in the future.”

A version of this article was first printed by Nikkei Asia on July 27. ©2022 Nikkei Inc. All rights reserved.

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