Video Source: IBD
The OODA Loop News Brief Team surfaced a story earlier today – Fire at vital tech factory could worsen global computer chip shortage – which we thought was important enough to provide further in-depth analysis.
A very specific insight from our recent OODA Network Stratigame – Scenario Planning for Global Computer Chip Supply Chain Disruption – was the role the foreign production of Specialized Manufacturing Equipment (SME) built for the manufacturing of computer chips would play in the health of the computer chip supply chain for the U.S. Of strategic concern:
- 100% foreign production of SME built for semiconductor manufacturing – on which all U.S. Chip Manufacturers are dependent.
- The primacy of consumer good delivery during intermodal supply chain disruptions brought on by the pandemic would disrupt the shipment of SME to U.S. companies; and
- Component parts and subsystem availability would be impacted by pandemic supply chain shortages, causing a shortage of SME for semiconductor manufacturing.
Source: ASML Holdings
Add the recent fire at the plant in Berlin, Germany owned by ASML Holding to our list of variables that could tack the global chip supply disruption into a worst-case scenario, sooner rather than later. The ASML Holding’s plant in Berlin is the sole provider of vital technology used to manufacture computer chips. The company is the largest supplier of photolithography systems and the only producer of extreme ultraviolet (EUV) lithography machines, which are used to etch circuits onto silicon wafers. The chips are later used by Apple, IBM, Samsung, and other tech giants. ASML Holding sold billions of dollars in equipment in just the third quarter of 2021 alone.
For further context (and consistent with our intermodal supply chain concerns listed above), according to Wired “each machine is roughly the size of a bus. Shipping their components requires 40 freight containers, three cargo planes, and 20 trucks.”
The world is experiencing a computer chip shortage due to the global pandemic, trade difficulties, droughts, and snowstorms. It has also coincided with a period of unprecedented demand, with chip sales reaching $40 billion in January alone. Semiconductors possess limited capacity, and building new plants requires massive investments and several years to complete. Semiconductor companies are racing to increase production and governments are seeking to bring plants to their own countries. If ASML is unable to recover from the fire and provide as many machines as expected, the shortage could increase in severity and last much longer.
A Strategic, Circular Firing Squad with Taiwan?
An added stressor is that Taiwan, the world’s largest semiconductor manufacturer, is equally as dependent on ASML Holding’s production capacity as the U.S. According to Focus Taiwan, with data from a recent SEMI report, Taiwan ranked as the world’s largest semiconductor equipment spender in Q3 of 2021. Following is the global breakdown of semiconductor equipment spending globally:
“Taiwan was the largest buyer of semiconductor equipment in the third quarter of this year, as domestic firms expanded production capacity and upgraded technologies to improve global competitiveness…Taiwan purchased US$7.33 billion worth of semiconductor equipment in the July-September period. Among the Taiwanese semiconductor suppliers gearing up to expand, Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker, which commands an over 50 percent share in the global market, has set out plans to invest US$30 billion in capital expenditure in 2021 as it develops its advanced 3-nanometer process with the aim of starting commercial production in 2022. Over the next three years, TSMC’s investments are expected to total US$100 billion.
In the third quarter, the total spending in semiconductor equipment worldwide hit a record high of US$26.8 billion, up 8 percent from a quarter earlier and also up 38 percent from a year earlier. The third quarter marked the fifth consecutive quarter of record-breaking global spending. China was bumped down into second place in the spending rankings after purchasing US$7.27 billion in semiconductor equipment in the third quarter, down 12 percent from a quarter earlier but up 29 percent from a year earlier. South Korea came in third, unchanged from a quarter earlier, as its semiconductor equipment spending reached US$5.58 billion, down 16 percent from a quarter earlier, SEMI added. North America and Japan claimed fourth and fifth place in the third quarter, respectively, after they purchased US$2.29 billion and US$2.11 billion in semiconductor equipment in the third quarter, up 36 percent and 19 percent from a quarter earlier, according to SEMI. In a research report released in July, SEMI forecast semiconductor equipment shipments will hit a new record high of US$95.3 billion in 2021, up 34 percent from a year earlier. SEMI said South Korea, Taiwan, and China will be the top three equipment spenders in 2021.”
What Next?
Semiconductor Equipment Manufacturing: Small Company R&D, Government Subsidy and “Made in the USA”: In a recent post, Is Taiwan’s Five-year Quantum Computing and Talent Initiative the Wrong Strategy for the Island Nation?, we argued that a Quantum-focused strategy for Taiwan was ill-advised and we encouraged SME manufacturing and innovation would be a better strategic spend for the chip manufacturing leader.
In light of the ASML factory fire in Berlin, we would make the same recommendation to the U.S. Technology Sector, the Semiconductor sub-sector, and the Federal Government: The U.S should be looking at its native SME R&D and production capabilities in the short and long term, as every 2-3 years a new technology generation requires advances in the industry’s highly specialized production equipment by relatively small equipment firms. Cost-sharing and government intervention will be needed for the increase in demand for small SME companies, bridging the R&D monies necessary for the development of the next generation of equipment. Companies with less than 250 employees account for 9% of manufacturing R&D spending with an R&D to sales ratio of 7.5%. (1, p. xvii). Add EUV lithography manufacturing capabilities to this recommendation.
Today’s Efforts Should be Informed by History: A seminal industry study identified the market forces, crises, and incentives that outsourced chip manufacturing in the first place (in the 1980s) during the period of Japanese competitive advantage and again in other parts of Asia in the 2000s (in hindsight, the shift to Taiwanese foundries has clearly proven radical and highly impactful). In each period, foreign countries were willing to subsidize the cost of new fabs, allowing for indigenous companies to grab market share. Questions that should be assessed based on this history include:
- How will this be avoided, not repeated, by the U.S. semiconductor industry?
- Is a commitment to large-scale domestic production in the U.S. and the building of fabs subsidized by the government a clear strategic priority?
- If so, is building such fabs in the U.S. possible in a timeframe for strategic, if not immediate, competitive advantage?
- Is the U.S. semiconductor industry structured into a collaborative ecosystem to effectively enable this national effort?
- If so, can this same ecosystem now step up to the plate to mobilize domestic EUV machine production?
Further Resources
Chip shortage: ASML factory fire could be another blow to global semiconductor supply | New Scientist: ASML Holding, which supplies a vital technology used in computer chips, has reported a fire at a manufacturing plant, but the extent of the damage isn’t yet known
ASML Keeps Part of Berlin Manufacturing Site Closed After Fire – Bloomberg: The company would not say how long the closure would last; Analyst warns that closure could worsen chip shortage.
The $150 Million Machine Keeping Moore’s Law Alive | WIRED: ASML’s next-generation extreme ultraviolet lithography machines achieve previously unattainable levels of precision, which means chips can keep shrinking for years to come.
Inside the machine that saved Moore’s Law | MIT Technology Review: The Dutch firm ASML spent $9 billion and 17 years developing a way to keep making denser computer chips.
An interesting video on How ASML Builds a $150 Million EUV Machine
EUV lithography systems – Products | ASML – Supplying the semiconductor industry
The Tech Cold War’s ‘Most Complicated Machine’ That’s Out of China’s Reach – The New York Times: A $150 million chip-making tool from a Dutch company has become a lever in the U.S.-Chinese struggle. It also shows how entrenched the global supply chain is.
Building Resilient Supply Chains and Semiconductor Manufacturing
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