Realignment of the Chip Sector?

Realignment of the Chip Sector?

09 December 2022Reading time: 6 minutes

Computer chips are essential to our daily lives and enable the use of modern and digital technologies. Since the chip shortage in 2021, the significance of these small components has become more apparent. Because current production mainly takes place in Asia, many countries have decided to reduce this reliance and invest significant sums to enable local production and development. Access to chips is also important for countries technological advances.

Computer chips are a constant companion of our daily lives. The first contact point begins with the ringing of the alarm clock and continues with the journey by car or public transport. At work, the use of computers or modern machines is often necessary. At the same time, the smartphone is always by our side. Today, life without modern technology and the necessary chips is almost unimaginable.

Chips essential for next generation technology

Technological advances rely on the further development of chips. Areas such as electric mobility, «5G» mobile networks, the internet of things or artificial intelligence require powerful and advanced chips. The technological advances that have been achieved over the last 40 years with the help chips are impressive. In the 80s and 90s, the first personal computers «PCs» emerged. Around the turn of the millennium, the internet age began and presented new market opportunities. A decade later, the smartphone revolution set in. The developments are far from over and chips will continue to play an important role.

According to the Semiconductor Industry Association (SIA), the revenue of the chip industry reached 556 billion US-Dollars in 2021. Due to higher demand and the resulting chip shortage, many manufacturers increased their production. This contributed to a 26% revenue growth compared to the previous year. As a comparison, industry revenue reached 200 billion US-Dollars in the year 2000.

More powerful chips required

To understand how chips are developed and why they are central for technological progress, it is necessary to delve a little into the subject. A chip is a central component of electronic devices. An essential part of it is the semiconductor or more specifically, the semiconductor material. If several of these semiconductor layers are applied, the electrical conductivity can be controlled. Finally, circuits can be constructed, which can then execute commands and store data.

A popular semiconductor material is the chemical element «Silicium». This is why an area in San Francisco where many technological companies are located is referred to as the Silicon Valley.

Manufacturing chips is complex, because the production process takes place on a very small scale and in special conditions. In addition, chip companies constantly try to design smaller semiconductors to improve performance and energy efficiency. With smaller semiconductors, it is possible to place more of them on a chip, which in turn increases performance. For this reason, chip size has not changed significantly over the past few years, but significant performance improvements have been achieved.

It is important to emphasise that there are different requirements for chips. Depending on the area of application, a semiconductor only needs to be conditionally powerful and efficient. For example, the requirements for an alarm clock are much lower than for the latest smartphone.

To develop powerful devices and applications, advanced chips are needed which contain particularly small semiconductors. These chips are not produced by every manufacturer. The development and manufacturing of such chips is costly, as research and development (R&D) is costly and the most modern production infrastructure needs to be installed.

Asia leading in production, US in development

The value chain of the semiconductor industry can essentially be divided into three areas. At the beginning there is R&D, which advances the basic semiconductor technology and develops the chip architecture. Moving on to production, special production equipment is used that can precisely manufacture these small components under special conditions. Once the chips have been manufactured, they can then be installed in various devices.

There are companies that handle the entire process themselves. However, most of them are specialists, operating in one particular area: R&D, production machines or manufacturing. The manufacturing process is capital intensive, which is why it is not worthwhile for all companies to have their own production lines. Instead, these tasks are outsourced to specialised manufacturers who then produce on behalf of several companies and can thus achieve economies of scale.

Roughly two thirds of production takes place in Asia. The region has established itself as a manufacturing hub due to low labour costs and sufficiently large pool of workers. In the process, Taiwan has established itself as a leading location for chip manufacturing. Only two countries, Taiwan and South Korea, have the necessary technologies to produce advanced chips.

Avoiding supply chain bottlenecks through increased independence

In the wake of the pandemic, supply chain bottlenecks and geopolitical developments, some countries as well as the EU have decided that they want to reduce their chip reliance on foreign countries. The objective is to encourage domestic production or to nearby regions. To accomplish this, multi-billion Dollar support packages have been promised by governments to help companies set up new production facilities and R&D. In the US, 280 billion US Dollars have been earmarked for this purpose over the next 10 years. With the European Chip Bill, the EU wants to use 43 billion euros of public and private money to increase competitiveness and double production capacity to 20% of the world market by 2030.

Applying pressure with chip production

Governments have realised that the ability to produce advanced chips is an important strategic advantage. If a country has insufficient access to advanced chips, it runs the risk of falling behind technologically.

The US has been in a trade conflict with China for several years. The source of this conflict is the US trade deficit with China. The USA exports significantly fewer goods to China than it imports from there. Since then, both sides have introduced new import tariffs and increased existing tariffs.

Now the US government has decided introduced new export restrictions to China targeting the technology sector. A particular focus lies on the development, manufacturing and use of advanced chips. The new regulations prevent China from accessing the technologies needed to produce these chips. Additionally, the sale of the chips and the equipment needed for their production to China is prohibited.

It is expected that these measures will have a significant impact on Chinese technology companies. Access to advanced chips becomes more difficult and constrains the development of next generation technologies. China has recognised this threat and begun to mobilise resources to design, develop and ultimately manufacture these chips. To achieve this, the government has assembled a group of tech companies and research institutes. With the help of a new chip architecture, this group is able to develop their own chips and secure China’s competitiveness.

The US government's measures are likely to be felt worldwide in the long term. As production increasingly shifts from Asia to the US and Europe, prices of all chip types are likely to increase. Although China plays an insignificant role in the production of advanced chips, their market share of cheap and older chips is significantly higher. If production conditions become more difficult, these low-cost chips may become more expensive and can no longer be produced on the same scale.

Because so many chips are needed worldwide, it is particularly relevant that they are and remain cheap. For example, an electric car needs around 2,000 chips, of which almost all belong to the basic and cheaper types. If the prices of chips rise, the end customer will ultimately feel the impact.


A world without chips is almost unimaginable. These small components can be found everywhere, which is why their availability is important. The whole process from development to production requires specialised knowledge and signficant financial resources. The development of advanced chips is particularly important for technological progress. These chips are particularly powerful and are used for next generation technologies such as artificial intelligence and autonomous driving.

Asia is an important chip production hub, with only Taiwan and South Korea able to produce advanced models. Several countries have recognised the strategic importance of the chip industry. As a result, the US and the EU have decided to spend billions on industry support over the next 10 years. The objective is to encourage more local production facilities and R&D.

Chips can also be used as a geopolitical tool. Without access to the most advanced chips, competitiveness declines together with the risk of falling behind technologically. The US has decided to significantly restrict the export of advanced chips and related technology to China.

21/03/2023 18:10:45


Write a Comment






* Required fields need to be filled in