GLOBAL CHIPS: FROM CRISIS TO STRATEGIES EPISODE 1 - Semiconductors, connecting or dividing the world? The chip shortage and the new arms race explained

Author: Matilde Castleberry


None of us can imagine a life without chips, and some couldn’t even survive without them. But why are they so important? What is their role in our lives and in the economy?


Importance and implementation of semiconductors 

Chips, also known as semiconductors, represent one of the wonders of the modern world. Small amounts of impurities are added to pure materials like silicon or germanium to create highly conductive materials. Semiconductors are vital for a countless and growing number of industries related to the production of electronic devices such as automobiles, communication, healthcare, energy, transportation and defence. So, what would happen if we suddenly ran short of them?

The risk of this happening for now remains an idea - terrifying - but just an idea. However, something is telling us that its materialisation might not be so unrealistic. To understand why, it's essential to briefly grasp what Global Value Chains (GVCs) are.


Global Value Chains, a diving world 

Value Chains represent the full lifecycle of a product, including design, sourcing, manufacturing, consumption, disposal, and recycling. Global Value Chains refer to the international distribution of the various steps of this cycle around the world. The more interconnected we become, the more these chains extend at an often-unregulated pace. 

The natural consequence of this product of globalisation is a fragile and perilous balance upon which the future of many countries is based. When considering a critical sector like the semiconductor one, this fragility becomes a double-edged sword. While on one hand countries like Taiwan, which hold an undisputed leadership in the sector, use it to protect their national security, less competitive countries or regions like Europe, inevitably depend on other economies. So, if a pandemic were to suddenly outbreak, one state invaded another one, or two world powers began an economic war, what would happen?

These events certainly sound familiar, and their echoes still reverberate in the halls of institutional buildings. COVID-19, the invasion of Ukraine, and the growing rivalry between the USA and China are all events that undermine Global Value Chains by disrupting diplomacy and transportations, with consequences observable in every corner of the world. Many countries have realised that we have relied too much on these economic chains and that it is no longer sustainable. Therefore, self-sufficiency in strategic sectors such as semiconductors, becomes crucial.


Solutions for self-sufficiency 

For this reason, an increasing number of countries are carrying out a number of protectionist policies and preferential trade agreements by reshoring and friend-shoring with the aim of achieving greater self-reliance. The consequence is an inevitable reconfiguration and division of GVCs. Some examples of these policies include the US' "Mineral Security Partnership," and "Chips and Science Act," or India's "Make in India," but also China's "Made in China 2025." And what about the EU?

As stated in the European Chips Survey Report, which aims at tracking the EU's semiconductor industry by collecting feedback from stakeholders, demand is expected to double by 2030. The EU Commission pointed out that in 2020, 1 trillion chips were produced, and the EU only had a 10% share of the global microchip market, making it heavily dependent on non-EU suppliers. To make matters worse, disruptions in the semiconductor value chain are expected to last well into 2024. 

For this reason, also the European Union has decided to implement a number of policies, including the ‘European Chips Act’ approved on July 25, 2023. The resolution aims at increasing the resilience of the EU's semiconductor ecosystem and at increasing its global market share, with ambitious goals for the years to come. 

Semiconductors are the linchpin of our interconnected world, influencing economies and alliances. In our next article, we'll unveil the key global players in semiconductor production, shedding light on the forces shaping this vital industry. Join us on this journey to uncover the faces behind the circuits that connect and divide our world.