Why the world is short of computer chips, and why it matters

WHAT IS A CHIP?

It’s the thing that makes electronic items smart. Made from a material, usually silicon, that “semi-conducts” electricity, the chip performs a variety of functions.

Memory chips, which store data, are relatively simple and are traded like commodities. Logic chips, which run programs and act as the brains of a device, are more complex and expensive.

These often carry names like Apple or Nvidia, but those companies are actually just the designers of the semiconductors, which are manufactured in factories called foundries.

WHY IS IT SO HARD TO COMPETE?

Manufacturing advanced logic chips requires extraordinary precision, along with huge long-term bets in a field subject to rapid change. Plants cost billions of dollars to build and equip, and they have to run flat-out 24/7 to recoup the investment. But it is not just that. A factory also gobbles up enormous amounts of water and electricity and is vulnerable to even the tiniest disruptions, whether from dust particles or distant earthquakes.

WHO ARE THE BIG MANUFACTURERS? 

TSMC pioneered the foundry business — purely manufacturing chips for others — with government support in the 1980s and now produces the most-sophisticated chips. Everyone beats a path to its door to get them; its share of the global foundry market is larger than its next three competitors combined.

Samsung dominates in memory chips and is trying to muscle in on TSMC’s gold mine. It’s been improving its production technology and winning new orders from companies such as Qualcomm and Nvidia.

Intel is the last US heavyweight in the field, but its business is heavily concentrated in manufacturing its own-brand chips that serve as the central processing unit (CPU) for laptops and desktop computers. Production delays have made it vulnerable to rivals, who are winning share using TSMC to produce their designs.

Intel unveiled an ambitious bid in March to regain its manufacturing lead and break into the foundry business by spending US$20 billion to build two new factories in Arizona. It is also looking to buy other chipmakers.

Smaller manufacturers include the US’s GlobalFoundries, China’s Semiconductor Manufacturing International Corp (SMIC) and Taiwan’s United Microelectronics. But they are at least two to three generations behind TSMC’s technology. Famous names such as Texas Instruments, IBM and Motorola, all US companies, have exited or given up trying to keep up with the most advanced manufacturing.

HOW IS THE COMPETITION GOING?

The two giants are spending heavily to cement their dominance: TSMC said in April it would ramp up its capital expenditure over the next three years to US$100 billion, including about US$30 billion on capacity expansion and upgrades in 2021, from a record US$17 billion last year.

Samsung is earmarking about US$151 billion for a decade-long project to catch its Taiwanese rival, part of a broader plan by South Korean companies including SK Hynix to spend roughly US$450 billion to build the world’s largest chipmaking base.

China is pushing hard to catch up as part of its efforts to reduce its reliance on US technology, spurred by US moves to restrict access to American intellectual property such as software and gear for designing chips.

But China has a long way to go. For instance, in the automotive sector, Chinese chip design companies still aren’t able to come up with the advanced chips that serve as the brains for today’s ever-smarter cars. China pledged again this year to boost spending and drive research into cutting-edge chips as part of its new five-year economic blueprint.

While it did not give specifics, SMIC has announced plans for a US$2.35 billion plant with funding from the city of Shenzhen.

The facility could begin production by 2022 and eventually churn out each year about half a million 12-inch wafers, which are used to fabricate chips. By comparison, TSMC shipped about 12.4 million such wafers in 2020.

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