Semiconductors flood our media, but it is not clear why a manufacture can be so scarce. It seems even more incomprehensible to a manufacturing powerhouse like the European Union, but the reality is that each semiconductor is the result of a very complex production chain, from design to lithography, production and assembly, so no economy can integrate the entire chain vertically without incorporating added value from other geographies.
The semiconductor shortage is due, at least in part, to that complex chain that operated without friction in a world with hardly any trade barriers prior to the Trump presidency and certainly without the barriers to movement in the pandemic. Beyond the intermittent stoppages of some key ports in goods and the limitations of air transport, another important reason explains the shortage of semiconductors: more and more are needed for the same product, the greater digitization in industrial production.
In other words, a car today needs many more semiconductors and even more so if it is electric.
In addition, the semiconductors used in a traditional vehicle and an electric vehicle are different. In fact, the more the technology advances, the more complicated and usually smaller are the chips that have to be produced, so there are very few companies capable of doing so. This is producing bottlenecks in the production of many manufactures and a sharp increase in the prices of components including semiconductors.
This is why some compare semiconductors to oil. If in the late 1970s and early 1980s oil was the cause of two world economic crises characterized by a virtually global recession and rising inflation, the same could be true today if the semiconductor shortage worsens. In fact, the problem is more pressing for the Chinese economy, which still depends on the rest of the world for the provision of extremely necessary semiconductors for sectors where China has achieved a comparative advantage, such as electronic products, electric vehicles or 5G. In fact, China has been importing more semiconductors than oil for years.
In the EU, although there are leading companies in the most added part of the semiconductor production chain, such as lithography, we are still net importers and dependent on the rest of the world for the supply of our main industries. This dependence has been complicated by U.S. measures since 2018 to contain the Chinese technological rise. Specifically, the export of semiconductors to companies like Huawei is highly constrained by North American regulations. In addition, among the world’s leading semiconductor exporters are Taiwanese companies whose main markets are the US and China. Faced with this powder keg, both the EU’s decision to subsidize the efforts of European semiconductor companies and that these will be necessary to produce any sophisticated manufacturing seems right. Even so, it seems important to bet on processes with higher added value in semiconductors, such as design or lithography, avoiding subsidizing parts that are easier to reproduce and where future overproduction is very likely, especially given the enormous investment effort of China in this sector.
Alicia Garcia Herrero
he is an economist