Chipping away at the digital economy

How the recent stockpiling of semiconductors is likely to affect the Gulf and beyond

By Rahul Vaimal, Associate Editor
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Largely unseen in one’s everyday life, semiconductor chips are the heart of nearly all of our society’s modern infrastructure—from utility grids to telecommunications services, smart transport networks, and everything in between. They are also critical to investments being made in 5G networks, a key technology that is shaping the future of all industries. It is hard to overstate just how damaging a shortfall in chip supplies would be to the global economy. Yet we’re now coming dangerously close to what some have dubbed “chipageddon” .

Semiconductor companies have recently been asking their customers for patience as the industry works through a rapid increase in demand from nearly every industry vertical. The COVID-19 pandemic has only exacerbated the situation, with manufacturing temporarily suspended in some instances, and at the same time people relying on computers and work-from-home technology more than ever before.

Even with chip manufacturing running at full steam, the boss of semiconductor company AMD recently noted that shortages are more the result of a demand-focused environment rather than manufacturing issues. Leaders at Qualcomm, one of the world’s largest mobile chipmakers, also commented on shortages across the board, citing the industry’s reliance on just a handful of players. Risto Puhakka of VLSIresearch, an industry-analysis firm, summed it up bluntly by saying that in the whole semiconductor industry, “there is very little [spare] capacity right now”, as we’re coming off a record investment year and yet the demand continues to grow.

But it is not just a matter of demand. One of the key drivers behind this recent chipset fallout is the limitations put on the free trade of chips, most notably US policies towards Chinese companies under the pretext of national security. Chinese companies such as Huawei have now been blacklisted by the US government, which prevents it from buying the chips it needs for smartphones and communications equipment from American suppliers. The Trump administration also tightened rules even further to stop any company that uses American gear from supplying Huawei.

As a result of these trade policies, last year Chinese companies sought to protect themselves from a growing tech ban. This saw imports of computer chips surging over the year. Bloomberg estimated that in 2020, Chinese businesses bought almost $32 billion of equipment used to produce computer chips from Japan, South Korea, Taiwan and elsewhere, a 20% jump from 2019. While companies like Huawei also stockpiled supplies as a result of US sanctions, imports of computer chips made up about 18% of all of China’s imports for the year.

SEMI, the industry association serving the global electronics design and manufacturing supply chain, has noted how US export control regulations would “ultimately undermine” the US national security interests by harming the semiconductor industry in the US and creating substantial uncertainty in the semiconductor supply chain. Western tech firms and governments have also started getting frustrated with US sanctions on Chinese technology. The Financial Times recently reported that a number of European technology executives and diplomats accused the US of using the sanctions against Chinese technology companies to keep them away from the market, while the US administration hypocritically granted exemptions to some US companies to do business with some Chinese technology firms.

Such trade limitations have become far more about economic influence than genuine national security concerns. Former US Attorney General William Barr was quoted as saying that some private American businesses are actually the problem for not doing enough to maintain American technological strength. Barr has further contended that the US has been “the technological leader of the world”, but that China has been making great strides to supplant that position.

Despite US trade policies, China is well-positioned to find alternatives for the traditional semiconductor industry. The Chinese government’s latest five-year economic strategy includes greater self-reliance on technology. Chinese companies like Semiconductor Manufacturing International Corp. have already ramped up their purchases of the machines needed to make computer chips. Huawei has also finished construction on its first domestic chip manufacturing factory and is planning to have another chipset factory in Shanghai.

For now, the shortage in global chipset supplies is likely to be felt in the Middle East as well as abroad. Obstructions to free trade will ultimately hamper supply, whatever the source markets may be. There are also no local semiconductor or chipset manufacturing companies operating at scale locally. The region has very ambitious digital transformation plans to bolster socio-economic development through the adoption of smart solutions and connected devices. Without the chips needed to support those systems, their realization may be delayed.

If nothing else, the possibility of “chipageddon” reminds us all of the importance of open trade and global collaboration, where different companies—from different countries—can work effectively to serve an increasingly digitized world.

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