Taiwan's semiconductor industry is considering distancing itself from the United States. Credit: Handout.

A supply-chain disruption to one of the world’s most essential technological products is quickly becoming the flashpoint for global tensions. The fallout from the Covid-19 pandemic has not just hit international markets in unprecedented magnitudes but has also affected market dynamics in almost unprecedented ways. 

Originating in China, the novel coronavirus hit East Asia first. This had a massive impact on business operations in the region, from manufacturing to shipping. But by far the most important consequence of this phenomenon, and the one the world continues to reel from today, was the disruption it inflicted on the global supply of semiconductor chips.

For months now, the world has slowly been inching toward the most severe shortage of these vital devices ever experienced. Companies across industries, from mobile-phone producers to automobile manufacturers, are speaking out on the danger this trend is posing to global production.   

While many fields of manufacturing were able to recover – some relatively quickly – from the shock to the system triggered by lockdowns and travel restrictions, chip production has not seen this same comeback.

Initially, manufacturers of semiconductors assumed that demand would fall drastically as global production across the board fell. However, the exact opposite actually took place. Demand for semiconductor chips boomed as cars and medical devices continued their technological advance and an increasing number of products began requiring these chips.

This miscalculation of the market has been exacerbated by the fact that chip production is, surprisingly, not a particularly widespread business. Currently, there are only three major chip producers in the world: Intel in the US, Samsung in South Korea, and TSMC in Taiwan. These companies are yet to respond to the ever-increasing demand for their product. 

Already the shortage has had a ripple effect throughout the automotive industry. In the US, manufacturers have significantly cut back production because of a lack of chips for their increasingly high-tech cars.

US chip ban has had many undesired punitive effects. Image: Twitter

Several months ago, American semiconductor manufacturers began receiving frantic phone calls from auto executives at Ford, Volkswagen, BMW, Daimler-Benz, Fiat Chrysler and General Motors – every one begging them to ramp up production.

Recent news reports revealed that lack of conductors has forced GM and Ford to slash production in three US states as well as in Canada and Mexico, presenting a huge threat to these companies’ employees as well as those of their suppliers. 

The crisis has already begun to extend outside mere market parameters. The repercussions to US business have attracted the attention of a host of policymakers, including US President Joe Biden’s office.

Biden is leaning heavily on chip producers and host nations of other similar companies internationally to find solutions to the supply problem. But apparently, the president’s attempts are simply not cutting it.

Last week, governors of eight states urged the White House to “redouble those efforts,” warning of a “growing list of automakers, suppliers, and dealers negatively affected by the shortage.” 

And still, the current dilemma has yet to see its full dimensions. As several analysts have pointed out, the semiconductor crunch is one with potentially serious geopolitical implications.

Of the world’s three major chip producers, it is Taiwan Semiconductor Manufacturing Company (TSMC) that has for the better part of the three years been moving toward industry dominance.

Unlike its competitors Intel and Samsung SK, TSMC is a chip “foundry.” a company that churns out chips for designers without factories, or “fabs,” a production approach that allows super-high production with extremely low costs. This has made TSMC the biggest and most efficient manufacturer of semiconductors, including the more sophisticated wafer chips, in the world. 

TSMC is the largest contract chipmaker in the world. Photo: tsmc.com

The company is now the go-to for some of the biggest car companies and for the largest phone producers on Earth, Apple and Huawei. Prior to the current supply-chain shock, TSMC’s growing pre-eminence in the semiconductor field was already becoming a point of tension in the long-standing conflict between Taiwan and mainland China. The growing stress on global industries has the potential to worsen that schism.

“You have an entire global electronics supply chain that is dependent on Taiwan, and it’s 100 miles offshore of China,” said Stacy Rasgon, a semiconductor analyst at the financial services firm AllianceBernstein. “Given everything going on with geopolitical tensions, that’s becoming strategically untenable.”  

As analysts have been warning, the distraction of American leadership from Asian affairs has allowed China to ramp up its aggressive posture toward Taiwan in the recent period. The tremendous strain on global business caused by the semiconductor deficit and Taiwan’s unique place vis-à-vis that crisis could offer Beijing the opportunity to make even more advances on the island it perceives as a rogue province of the PRC. 

The significance of the current semiconductor supply-chain cut goes way beyond economic output: It presents a strategic threat at the international level. US policymakers and their counterparts abroad must make this challenge a top priority.   

Johan Svensson

Johan Svensson is a geopolitical analyst for Sandberg & Löfgren Consulting based in Malmö, Sweden.