We’re living in a world where chips are everywhere and nothing seems to work without them. They’re not just in computers and smartphones, but practically in all electronic devices. Not even our cars run without chips anymore. In fact, an electric car can have over 3000 of them.
20 years ago the joke was that one day even our fridges and toasters will be “smart” and connected to the internet (thus needing processors, i.e. chips). Well, guess what? We’ve had such devices already for some time, and if you’re bored, I recommend you check out this programmable toaster that produces the day’s weather pattern on your toast.
How alarmed should we then be when we keep seeing headlines like these?
“How a chip shortage snarled everything from phones to cars”, and
“What's causing the chip shortage affecting PS5, cars and more?”
Indeed, the world is currently seeing an unprecedented shortage of chips – and there’s no immediate remedy in sight.
What’s behind this shortage? The quick and dirty answer is that it’s a result of a mixture of Covid-19 related factors, including work stoppages, broken transportation logistics, and (paradoxically) increased demand of computers, smartphones, and other gadgets. After all, what else can you do during a lockdown than zoom or play?
But there’s also a geopolitical dimension here. Nations that control the most advanced chip manufacturing companies – and thus the actual semiconductor fabrication plants, a.k.a. foundries – have an edge, because they can literally use chips as … well … chips in the geopolitical game.
There aren’t many chip manufacturers left at the industry’s cutting-edge. As reported by the Economist, the number has fallen from over 25 in 2000 to three.
Of the remaining three, Intel needs no introduction, but has seriously fallen behind, and as we heard in the recent Intel Unleashed keynote, their 7 nanometer process is even more delayed than what was announced in the summer of 2020. Intel’s stagnation is obviously bad for the US and was also one of the reasons why Apple decided to ditch Intel in favor of Arm-based custom designed chips last year.
The other two manufacturers are Taiwan Semiconductor Manufacturing Company (TSMC, who by the way now produces all new Apple chips) and Samsung. And yes, as you can easily see by looking at a map, both Taiwan and South Korea are very close to China.
China is of course also pouring more gasoline into its state-capitalist machinery in order to become self-sufficient in chips. SMIC is China’s largest contract semiconductor manufacturer and the nations bet at creating a rival to TSMC and Samsung, but its technology is still far behind and it is not able to manufacture the most cutting-edge components yet.
For a deeper analysis of the geopolitics around chips, I recommend Ben Thompson’s article Chips and Geopolitics on Stratechery.
So where is EU in all of this? Well let’s take a look at a slide that Intel’s new CEO Pat Gelsinger used in the keynote mentioned earlier:
Screen capture from “Intel Unleashed: Engineering the Future” keynote in March, 2021.
From a European perspective, this is undoubtedly a very sad image. Only 5% of the leading edge chips are, according to Intel, currently manufactured in Europe. Note also how big of a chunk the Asian manufacturers, mainly TSMC and Samsung, account for.
If the US is feeling stressed about the global chip situation, the EU should be outright panicking.
During the keynote, Gelsinger not only spoke about the US’s need for increased chip production, but also repeatedly mentioned the EU’s dire situation. Some alleviation might come via Intel’s new IDM 2.0 strategy:
Our IDM 2.0 model has an important 3rd element: today I’m announcing our plans to be a world-class foundry business and a major provider of U.S. and European-based capacity to serve customers globally. The digitization of every industry is accelerating the global demand for semiconductors at a torrid pace. But a key challenge is access to manufacturing capacity. Intel is in a unique position to rise to the occasion and meet this growing demand, while ensuring a sustainable and secure supply of semiconductors for the world.
While those are nice words, it’s good to remember that Intel is very much an American company, and as such it will ultimately always bend the knee to the US Government.
What the EU desperately needs is not just new foundries on its soil, but new foundries that are owned and operated by European companies.
That’s the reason why earlier this month the EU pledged more than €130 billion to develop next-generation digital industries in an attempt to achieve “technological autonomy” and reverse the widening gap with the US and Asia. By 2030, as part of its new Digital Compass plan, the EU hopes that 20% of all advanced chips would be manufactured within the bloc.
It’s high time that the EU has woken up and attempts to do something for the sake of “digital sovereignty”. Let’s hope the intervention doesn’t come too late, because in matters that are complex and capital intensive, change doesn’t happen overnight.