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Semiconductors in 2023: a not so ‘semi’ decoupling

Marion Laboure
Cassidy Ainsworth-Grace
Deutsche Bank Research Management
Stefan Schneider

US bans on certain exports for advanced computing mean a decoupling in the chip industry is imminent. That will likely affect all points in the complex global supply chain for semiconductors which, until recently, was very globally integrated.

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Amid the deglobalisation trend, two ecosystems will likely start to develop within semiconductors in 2023. One centred around the US, the other around China. The separation of powers was brewing before the war in Ukraine, but the conflict has likely intensified it. If two chip ecosystems do indeed develop, China could become more important for non-US chip companies in the long-term.
The recent US ban on American companies’ exports of software and equipment for advanced computing chips represents a shift from ‘outpacing Chinese technological advances’ to ‘targeting a decoupling of the semiconductor supply chain’.
The US rule has also thrown upside down the supply chains of semiconductors. Until now, the industry was well-integrated within a highly specialised global system. Each region was responsible for different stages of the production process as it made use of its comparative advantage. This scenario only works well, however, when there is free trade and positive geopolitical relations. Because there are more than 50 points across the value chain where one region holds more than 65 per cent of the global market share, a failure in any can lead to disruption in the entire industry.
One particular point in the global supply chain which will likely feel the ripple effect from the US rule is Taiwan. The island dominates the production of advanced semiconductors. Apart from the risk caused by export bans, the island is vulnerable to geopolitical disputes and possible natural disasters.
The global importance of TSMC, Taiwan’s large semiconductor company, is highlighted in the fact that it has the capacity to manufacture 54 per cent of the world’s semiconductors and 90 per cent of the most advanced chips. Regardless of its global importance, its physical presence is local. Nearly all of its long-term assets, including its manufacturing facilities, are in Taiwan.
Taiwan continues to rely on strategic partnerships with the West – the US is its critical international supporter. Meanwhile, China is its largest export market. Nancy Pelosi’s visit to Taiwan in August added pressure to the semiconductor industry. Any future restrictions could squeeze access to inputs necessary for production and end markets. To be sure, it is in the interest of neither China nor the US to damage Taiwanese chipmaking capacity or cut off market access as Taiwan’s role is not easy to replace. Achieving tech parity with Taiwan would likely take years, whilst the same cost efficiency is a long way away.
Aside from geopolitical tensions, the world’s hub for semiconductors is situated in one of the most tectonically complex regions in the world. To address that, TSMC facilities are built with seismic activity in mind. Yet, if a major earthquake were to cause significant damage to Taiwan’s chipmaking capacity, the rebuild could take years. In the case that Taiwan goes offline, everything from 5G networks, to the development of the ‘metaverse’, to the availability of dishwashers will be impacted. 

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