15 June 2021
Semiconductors have made news recently because of a shortage of microchips earlier this year. Though the causes of the semiconductors’ shortage are not due to a shortage of access to raw materials but rather because of the Covid-19 crisis and the ensuing fluctuating demand, the threats to EU strategic autonomy and the fragility of this market are explicit. Semiconductors have become a critical component in today’s globalised economy and armed forces as they are a vital component in any current electronic device. However, the dependence on Asia and, most notably, Taiwan has generated a significant response from world players such as the US, the EU, and China. Thus, even though it appears the shortage is temporary, it seems likely that such events will continue to occur in the absence of a more coherent and global strategy.
Semiconductors are essentially defined as crystalline solids which can act both as a conductor and insulator. They are used in many critical components of today’s electronics industry such as diodes or transistors and intergraded circuits (Encyclopedia Britannica, 2021). Producing semiconductors and microchips is usually a long process that can take up to 26 weeks. Most of these components are produced in Asia by three companies that occupy a dominant position in the industry: Intel, Samsung, and Taiwanese Semiconductor Manufacturing Company (TSMC) (CNBC, 2021).
These components permeate throughout different branches of the economy as most electronics require such materials. However, the hardest-hit industry thus far seems to be automobile companies which are expected to lose over $60 billion in the US alone (Wayland, 2021). As the pandemic started to take hold, manufacturers expected a drop in consumer demand and a cut down on their semiconductor’s orders. However, demand for cars proved to be more resilient than anticipated. Constructors rushed to reorder microchips whose production had been diverted towards computer electronics due to the growing usage of connected devices during the several lockdowns in the world. Since the production of these components can take up to half a year, the supply was unable to meet demand on such short notice (Tadjjeh, 2021).
Beyond the mere economic concerns, semiconductors also play a considerable role in today’s modern armies security apparatus. Their role as conductor and insulator makes it a vital component in any military hardware that relies on electronics. Such hardware includes aeroplanes, tanks, drones, communication services, radars, and missiles. In essence, semiconductors play a role comparable to steel in modern armies: a vital resource without which the armed forces’ capabilities would be seriously hampered. Thus, ensuring the EU’s strategic autonomy in this sector is a vital concern.
The obvious strategic implications of such a shortage have prompted the EU to create the “2030 digital Compass: The European Way for the digital decade” initiative. This plan is a comprehensive strategy for the EU to become a world leader in digitalisation and information technology. Integrated into this plan is a clause that aims to double the global market share of semiconductors produced in Europe from 10% today to 20% by 2030 (Amaro, 2021). The goal also appears to expand and further develop new smaller components by the target year. This digital compass should be financed by the recovery and resilience facility, a sizeable finical aid programme. It is expected that 20% of its budget of €672.5 billion should be allocated to the digital compass programme (European Commission – European Commission, 2021).
What appears preoccupying is that over 60% of the world’s foundry revenues come from the Taiwanese company TMSC. Subsequently, there has been growing fear that in the event of a US conflict with China, the world’s supply of semiconductors might be subject to serious setbacks and shortages of far greater magnitude than the one currently being experienced in 2021. Therefore, it seems even more pressing to develop a European strategic autonomy or risk being unwillingly involved in a future conflict in the pacific (Lee, 2021).
Nonetheless, industry leaders have questioned if this goal is realistic as the US and China have also started to upgrade their production infrastructure of semiconductors. Not only is constructing semiconductor foundries expensive, but it also takes several years and needs to be regularly updated with newer machines to keep up with the pace of innovation. It seems challenging for the EU to catch up with American and Asian producers, who already have several decades of experience and infrastructure accumulated (DW News, 2021). What might make this objective even more complicated is that the Biden administration has also proposed a plan to upgrade and become self-sufficient in the production of semiconductors. As it stands, the US aims to spend an extra $50 billion on research and production to boost its competitiveness against China and guarantee its autonomy. In these conditions, the road ahead for European producers seems strenuous (Winck, 2021).
Incidentally, properly developing EU strategic autonomy is also profoundly linked to the value chain attached to it. Thus far, EU companies are still very reliant on the global supply chain to produce such complex materials. R&D companies in charge of conceiving semiconductors and microchips and the companies with the capabilities to make the machines necessary to operate foundries are distributed across the globe. This distribution implies that any shot at building a truly European autonomy in this domain implies complete vertical integration of the supply chain, which might not be realistic in such a small amount of time (Kleinhans, 2020).
What seems to be slightly more reassuring is that the shortage is not due to a lack of access to raw materials but a production deficit due to fluctuating demand. We can expect supply to return to normal levels by next year, however, a few lessons learned from the incident should nonetheless be noted, which could be applied to strategic and military concerns.
The automobile industry responded to the shortage by reducing the number of microchips present in their cars by switching back to analogue dials for the speedometer in the Peugeot 308 model or reducing the size of the display on the Renault Arkana. Moreover, other companies decided to continue production while allowing some space to add the parts currently unavailable due to the shortage (Polymatters, 2021). Thus, future models of military hardware may be designed while bearing in mind the risks of potential shortages in critical components or resources.
More fundamentally, one of the key lessons that could be learned from the shortage and the broader Covid-19 crisis is the need for a more comprehensive long-term strategy. Previous shortages during the year 2020 are further examples of the necessity to think about autonomy for eventualities that might be overlooked. As the future challenges of the 21st century, such as climate change or resource scarcity, will likely play an essential role in the strategic considerations of the coming decades.
Written by Yann MILO, Researcher at Finabel – European Army Interoperability Centre
Sources
Amaro, S. (2021). The EU wants to boost its chip production as Covid fuels a global supply shortage. CNBC. [online] Available at: https://www.cnbc.com/2021/03/09/eu-to-step-up-production-of-semiconductors-as-covid-induces-shortage.html
CNBC. (2021). How The Global Computer Chip Shortage Happened. [online] Available at: https://www.youtube.com/watch?v=sfAyXjRFUJk
Drezner, D. W., Krebs, R. R., & Schweller, R. (2020). The End of Grand Strategy. 12.
DW News. (2021). The European semiconductor industry and its global competition | DW News. [online], Available at: https://www.youtube.com/watch?v=bKINwXXzlaQ
Encyclopedia Britannica. (n.d.). Semiconductor | Definition, Examples, Types, Uses, Materials, Devices, & Facts. Encyclopedia Britannica. Retrieved June 8, 2021, from https://www.britannica.com/science/semiconductor
European Commission – European Commission. (2021). Recovery and Resilience Facility [Text]. European Commission – European Commission. https://ec.europa.eu/info/business-economy-euro/recovery-coronavirus/recovery-and-resilience-facility_en
Kleinhans, J.-P. (2020). Geopolitics of the Global Semiconductor Value Chain » directions blog. Directions Blog. [online] Available at: https://directionsblog.eu/geopolitics-of-the-global-semiconductor-value-chain/
Lee, Y. N. (2021). 2 charts show how much the world depends on Taiwan for semiconductors. CNBC. [online] Available at: https://www.cnbc.com/2021/03/16/2-charts-show-how-much-the-world-depends-on-taiwan-for-semiconductors.html
Polymatters. (2021). Why the World is Running Out of Computers. [online] Available at: https://www.youtube.com/watch?v=IOvqN23Sr4o&t=572s
Semiconductors: Towards European Strategic Autonomy. (2021). EIAS. [online] Available at: https://www.eias.org/op-ed/semiconductors-towards-european-strategic-autonomy/
staff, E. editorial. (2021). Biden lays out ambition to establish China-free tech supply chains. https://eandt.theiet.org/content/articles/2021/02/biden-lays-out-amibition-to-establish-china-free-tech-supply-chains/
staff, E. editorial. (2021). EU sets target for semiconductors and quantum technologies. https://eandt.theiet.org/content/articles/2021/03/eu-sets-target-for-semiconductors-and-quantum-technologies/
Tadjjeh, Y. (2021). Semiconductor Shortage Shines Light On Weak Supply Chain. [online] Available at: https://www.nationaldefensemagazine.org/articles/2021/5/21/semiconductor-shortage-shines-light-on-weak-supply-chain
Wayland, M. (2021). How Covid led to a $60 billion global chip shortage for the auto industry. CNBC. [online] Available at: https://www.cnbc.com/2021/02/11/how-covid-led-to-a-60-billion-global-chip-shortage-for-automakers.html
Winck, B. (2021). Biden reveals plan to solve crippling shortages of computer chips, batteries, and medicine. Business Insider France. [online] Available at: https://www.businessinsider.fr/us/biden-supply-chain-shortages-plan-semiconductors-batteries-trade-manufacturing-strategy-2021-6?op=1
