As the war in Eastern Europe rattles global markets, chipmakers feel optimistic that the already overstretched sector would withstand disruptions caused by the war.
Although worries about disruptions in the supply of raw materials – namely neon gas and palladium – enterprises in East Asia and North America demonstrate their ability to adapt to changing conditions. Manufacturers of semiconductors, which provide crucial components for electronic devices used in various sectors, have anticipated disruptions and are taking steps to mitigate their consequences, including stockpiling, process innovation, and procurement from new sources.
The absence of exposure to the Russian market also protects the sector from a rapid drop in revenue. At the same time, the war is projected to have a negative impact on the long-term development prospects of what had been a promising upper-middle-class market.
The fog of war obscures any potential consequences that may arise as a result of the conflict. However, after years of operating in a context of high unpredictability due to trade wars and pandemics, chipmakers have learned to anticipate the unexpected and prepare for it. The conflict in Ukraine may be the next stage in increasing the industry’s ability to withstand crises.
A study published in early February by the research company Techcet highlighted critical elements purchased from Ukraine and Russia, including C4F6, palladium, helium, and neon gas – the latter of which the United States buys in large quantities from Ukraine and is the most dangerous. SEMI (a semiconductor suppliers organization) sent out an email to its members the next week, asking them to check their supply chains and take precautions in areas where they were most susceptible.
Even yet, when hostilities erupted, the industry’s major firms, such as SK Hynix, United Microelectronics, GlobalFoundries, Advanced Semiconductor Engineering (ASE), Intel, and Micron, each issued comments assuring investors that they were prepared to withstand the danger.
“The sector learned its lessons in 2014,” Sravan Kundojjala, an analyst at Strategy Analytics, said Al Jazeera, referring to Russia’s annexation of Crimea, which resulted in a 600 percent increase in neon gas prices as a result of the crisis.
According to Kundojjala, the interruption prompted the Dutch company ASML to cut the quantity of neon gas required in their industry-standard DUV lithography equipment by between 30 and 50% due to the disturbance.
As a result of these efforts, the dependency on Russia and Ukraine for raw resources has decreased over the years. Mario Morales, an analyst at market research company IDC, said this in an interview with Al Jazeera.
Morales went on to say that current supply constraints, as well as recent disruptions in logistics and transportation, keep the supply chain on high alert. He noted that power management integrated circuits (PMICs) and other analog and mixed-signal chips would have less tolerance to supply chain shocks.
Ferry, the chief economist at the Coalition for a Prosperous America and former executive in the semiconductor manufacturing industry, emphasized the importance of further supply diversification, stating that mining alternative sources for materials is more viable than the reengineering processes used semiconductor manufacturers such as ASML.
Diversification has been beneficial. ASML said last week that it is no longer sourcing more than 20% of its neon gas from Russia and Ukraine. Micron is also reorganizing its supply chain.
Taiwanese companies seem to be making the same transition.
As Joanne Chiao, an analyst with Taipei-based Trend Force, said to Al Jazeera, “Russia and Ukraine are not the sole providers of crucial materials for Taiwanese industries, which also acquire from other sources such as China.”
Taiwanese companies, according to Chiao, often maintain a safe amount of inventory as a precautionary measure. SK Hynix, based in South Korea, has also stocked up in readiness.
Chipmakers are also attempting to control their exposure to Russian markets beyond material security concerns.
$25bn electronics market
The key issue is not so much about how economic sanctions would affect direct semiconductor sales as it is about how they will affect Russia’s desire for semiconductors in the first place, which accounts for less than 0.1 percent of world consumption. The war’s influence on the country’s more significant electronics business, worth $25 billion.
Apple declared that it would cease all product sales to Russia only days after Ukrainian authorities penned an open letter to CEO Tim Cook pleading with him to pull the plug on its economic development. Despite the fact that Samsung, the most popular brand in Russia, has not announced its ban, the South Korean company may need to apply for permission from the United States to sell its handsets because its government was slow to join Washington-led sanctions when the conflict first erupted.
There are still questions about whether the US Department of Commerce would include cellphones, which had a market worth of $2.8 billion in Russia at the end of last year, in the list of sanctioned strategic commodities.
Even if market access can be gained, rising costs are likely to have a negative impact on consumer confidence.
According to Chiao, the iPhone 13 Pro 128GB price had increased by more than 50% since the dispute started, who spoke before Apple announced its restriction. Chiao attributed the increase to variations in foreign currency rates.
As a result, Russians would spend less on the newest devices and more on everyday essentials, according to her predictions, resulting in a significant reduction in demand for chips. According to her, this might lead to integrated circuit design firms reducing their wafer intake at foundries due to the situation.
Even though Russia’s vast market potential remained undeveloped, it had untapped potential due to its expanding population and a projected 124 million internet users by 2025. There would be an immeasurable loss of potential growth from a rising market that was about to achieve upper-middle-income nation status. This stage generally results in increased demand for electronic goods.
According to Ferry, the chip sector will suffer significant long-term consequences if Russia’s gross domestic product is reduced by 20%, as some economists forecast. This is particularly true if the war continues for an extended period of time.
“We’ll be OK in the short term, but if this battle carries on for a long period, it might give us issues,” he warned.
To Ferry’s knowledge, all consumer chipmakers will be affected, albeit the magnitude of the damage will be little compared to the magnitude of the impact of any similar circumstance that involves China, another military power whose irredentist behavior is inciting concerns of nuclear war.
Indeed, Taiwan’s TSMC, the world’s biggest contract chipmaker, lost more Chinese customers than it did in the Russian market but was able to weather the storm, according to Kundojjala.
He noted that the company lost $4.5 billion in 2020 – or about 12 percent of its total revenue – as a result of the United States’ ban on exports to High Silicon, Huawei’s semiconductor subsidiary. However, demand from other companies quickly made up for the loss, and TSMC’s revenue increased by 25 percent in 2021.
As a result, although TSMC can survive without Russia, it is unclear if Russia will do the same. Even though Taiwan ships just a few chips to Russia, some of them are of critical importance, such as Elbrus-branded chips, which are created in Russia and employed in the country’s military and cyber technologies.
Lack of alternatives
Moscow may have difficulty obtaining them from other sources shortly.
According to Chiao, “while Chinese foundries are capable of providing the 1Xnm and more mature process technologies required for Elbrus chip manufacturing, the designing and verification procedures will take at least one year for these foundries.”
Because of this, Russia has difficulties swiftly transferring Elbrus output to Chinese foundries, says the report.
According to Kundojjala, the biggest state-owned chipmaker in China, SMIC, is possible.
However, because SMIC relies on ASML for lithography and American companies for other critical equipment, they may be subject to regulatory action if they violate US sanctions against supplying Russia with chips, which apply to any company that incorporates American technology into its manufacturing processes.
Given China’s reliance on American technology for its chipmaking capabilities, Kundojjala believes it is improbable that the country will take such a risk for a relatively modest customer for the time being.
However, China’s efforts to create a self-sufficient ecosystem via the use of carbon chips and other emerging technologies might result in a shift in the balance.
According to Ferry, strategic reshoring is something that the United States should pursue more aggressively. In his opinion, corporations in the United States must go beyond the pursuit of the lowest-cost destinations and instead engage with solid and dependable friends while actively decoupling from China, Russia, and other unfriendly countries.
The term “post-neoliberal world” refers to the fact that we live in a hostile and uncertain environment.