Amid Ukraine fallout, crisis-hardened chipmakers move to adapt

Semiconductor manufacturers are stockpiling materials and seeking out new suppliers to minimise disruptions.

Taiwan Semiconductor Manufacturing Co logo
Chipmakers like TSMC are racing to adapt to the fallout of the war in Ukraine [File: Tyrone Siu/Reuters]

Taipei, Taiwan – As war in Eastern Europe shakes global markets, chipmakers appear confident the already-stretched industry can sustain interruptions from the conflict.

Despite concerns over shocks to the supply of material inputs – mainly neon gas and palladium – firms in East Asia and North America are showing the capacity to adapt. Many semiconductor manufacturers, which provide critical components for electronic devices used in countless industries, anticipated disruptions and are minimizing the effects either through stockpiling, process innovation, or sourcing from new suppliers.

A lack of exposure to the Russian market is also sheltering the industry from a sudden hit to revenue, though the conflict is expected to damage the long-term growth prospects for what had been a promising upper middle-income market.

The fog of war clouds what other knock-on effects may lurk around the corner. Yet, after operating in a climate of high uncertainty amid trade wars and pandemics in recent years, chipmakers have learned to expect the unexpected and plan accordingly. The war in Ukraine could be the next step in building the industry’s resilience to crises.

Research firm Techcet raised the alarm in early February with a report highlighting key materials obtained from Ukraine and Russia – including C4F6, palladium, helium, and, chief among them, neon gas, of which the United States imports 90 percent from Ukraine. The following week Joe Pasetti, VP at SEMI, a semiconductor suppliers group, sent an email to its members warning its members to review supply chains and make preparations where they were most vulnerable.

But as hostilities broke out, the industry’s big players, including SK Hynix, United Microelectronics, GlobalFoundries, ASE, Intel, and Micron, each made statements assuring investors they could handle the risk.

“The industry learned its lessons in 2014,” Sravan Kundojjala, an analyst at Strategy Analytics told Al Jazeera, referring to Russia’s takeover of Crimea which triggered a 600 percent spike in neon gas prices.

The disruption, Kundojjala said, led Dutch firm ASML to dramatically reduce the amount of neon gas needed in their industry-standard DUV lithography machines by between 30 and 50 percent.

China semiconductor [Bloomberg]
Semiconductors are a central component of electronic devices used in a vast array of sectors, including communications, computing, healthcare, defence, and transportation
[File: Qilai Shen/Bloomberg]

“The reliance on Russia and Ukraine for materials has lessened over the years since,” Mario Morales, an analyst at market research firm IDC, told Al Jazeera.

“However, existing supply constraints and recent disruptions on logistics and transport keep the supply chain on alert,” Morales added, noting power management ICs (PMICs) and other analog and mixed-signal chips will have less tolerance to supply chain shocks.

Jeff Ferry, chief economist at the Coalition for a Prosperous America and former industry exec, stressed the importance of further supply diversification, saying mining alternative sources for materials is more viable than reengineering processes that semiconductor suppliers like ASML use.

Indeed, diversification has helped. ASML said last week that it now sources less than 20 percent of neon gas from Russia and Ukraine. Micron also is reworking its supplies.

Taiwanese firms seem to be pivoting too.

“Russian and Ukraine are not the only sources of key materials for Taiwanese companies, which also procure from other sources such as China,” Joanne Chiao, an analyst at Taipei-based Trend Force, told Al Jazeera.

Chiao said Taiwanese firms are generally carrying a safe level of inventory as a backup measure. South Korea’s SK Hynix has also stockpiled in preparation.

Beyond material security, chipmakers are also looking to manage their exposure to Russian markets.

$25bn electronics market

The main concern is not so much how economic sanctions will hurt direct semiconductor sales – Russia had little appetite for chips, to begin with, accounting for less than 0.1 percent of global consumption. It is more the war’s impact on its broader electronics market, valued at $25bn.

Apple announced it would halt all product sales to Russia days after Ukrainian leaders wrote an open letter to CEO Tim Cook requesting he pull the plug. Though Samsung, the most popular brand in Russia, has not announced its own ban, the South Korean company may need to apply for permission from the US to sell its handsets since its government was slow in joining Washington-led sanctions when the war first broke.

Questions remain over whether the US Department of Commerce will include smartphones – a market valued at $2.8bn in Russia at the end of last year –among the sanctioned strategic items.

Even if market access can be clinched, soaring prices seem certain to dent consumer sentiment.

A display of iPhone 13 smartphones in the Apple Inc. store on Regent Street in London, U.K
Apple has halted sales of its products in Russia following Moscow’s invasion of Ukraine [File: Bloomberg]

Before Apple announced its ban, Chiao noted the price of the iPhone 13 Pro 128GB had risen by more than 50 percent since the conflict began due to foreign exchange rate fluctuations.

This will lead Russians to spend less on the latest gadgets, she said, and focus on daily necessities, which could prompt a drastic decline in demand for chips. This could prompt integrated circuit design houses to reduce their wafer input at foundries, she said.

Though Russia’s large market potential was underdeveloped, with a growing population and an expected 124 million internet users by 2025, it had untapped potential. The conflict will create an unquantifiable loss of potential growth from an emerging market that was entering upper-middle-income country status, a phase that usually spurs consumption in electronics.

Now, if 20 percent of Russian gross domestic product is wiped out as some economists predict, this will have major long-term ramifications for the chip industry, especially if the conflict continues, Ferry said.

“In the short term we’ll be OK, but if this war drags on, that could cause us problems,” he said.

Ferry said all consumer chipmakers will feel the effects, although the impact will pale in comparison to the effects of any comparable situation involving China – another military power whose irredentist aggression is stirring fears of war.

Indeed, Taiwan’s TSMC, the world’s largest contract chipmaker, lost bigger Chinese clients than the Russian market and walked it off fine, Kundojjala said.

He pointed out the firm lost $4.5bn in 2020  – about 12 percent of its total revenue – when the US banned exports to High Silicon, Huawei’s semiconductor subsidiary, but that demand from other firms quickly absorbed the loss, and TSMC made 25 percent higher revenue in 2021.

So while TSMC can live without Russia, it is not clear whether Russia can do the same. Though Taiwan exports few chips to Russia, some have strategic value, such as Elbrus-branded chips, which are designed in Russia and used in the country’s military and cyber technology.

Lack of alternatives

Moscow could struggle to get them made elsewhere anytime soon.

“Although Chinese foundries are able to provide the 1Xnm and more mature process technologies used for Elbrus chip production, the redesign and verification processes will take these foundries at least one year,” Chiao said.

“Hence, it is difficult for Russia to reassign Elbrus production to Chinese foundries immediately.”

“SMIC is an option,” Kundojjala said, referring to China’s largest state-owned chipmaker.

Yet, because SMIC relies on ASML for lithography and American firms for other critical equipment, they could risk regulatory punishment for breaking US sanctions on supplying Russia with chips, which extend to any company that uses American technology in its processes.

With China still reliant on American tech for its chipmaking capacity, it is unlikely they would take such a risk for a relatively small client for now, Kundojjala said.

This could change if China’s attempts to forge a self-reliant ecosystem by harnessing carbon chips or other nascent technologies pay off though.

Such strategic reshoring is what the US should double down on, according to Ferry. He said corporate America must move beyond looking for the cheapest destinations and partner with strong, reliable allies, and aggressively decouple from China, Russia and other hostile states.

“We are recognizing that we live in a hostile, unpredictable… ‘‘post-neo-liberal world.’”

Source: Al Jazeera