China-Taiwan Standoff Escalates Risks Over Global Chip Shortage and Supply Chain

08th August 2022, Singapore: In 2022, the world is constantly observing the rising geopolitical conflicts across the regions, supporting the unfavourable terms for global GDP from an economic standpoint. Especially when the world has not entirely recovered from the losses endured during the pandemic across all supply chains. Just five months after Russia's invaded Ukraine, fresh geopolitical tensions have arisen in the South China Sea between China (PRC) and Taiwan (ROC), indirectly involving the USA. The tensions peaked at new heights after US House Speaker Nancy Pelosi visited Taiwan (ROC) last week, further escalating tensions between the two superpowers.

Taiwan dominates the semiconductor industry alone with an overall market share of approx. 63% of the global semiconductors market, and TSMC (Taiwan Semiconductor Manufacturing Corporation) alone commands and caters to 54% of the global market share. It is known that the semiconductor is a complex electronic component that acts as a technological brain for almost all electronic devices and sensors used in manufacturing facilities. Major sectors such as the automobile, smartphones, and communication & technology firms are heavily dependent on Taiwan for the supplies of semiconductors, followed by South Korea with 17%, China with 6%, and the rest of the world with 13% of the global market share.

Since the Chinese authorities aggressively promote the idea of "ONE CHINA POLICY", there is a possibility of China attacking Taiwan, and it is clear how it will impact the semiconductor industry globally. According to the market experts, the world chip shortage amidst the pandemic has already affected the supply chain in 169 countries, and its impact surpassed the electronics sector. Industries like concrete, steel, and most manufacturing sectors have observed the lasting effect. At the same time, in 2021, only 70% of the requested components were catered to mobile phone manufacturers forcing the primary producers to raise the prices for each device.

In addition, during the last year, Taiwan witnessed the most severe drought in the previous 50 years amidst the low rainfall. Since manufacturing semiconductors requires a large amount of water, the facilities faced numerous difficulties followed by the consistent execution of cyber attacks from China. The COVID-19 outbreak and the work-from-home culture prompted an exponential surge in demand for semiconductors, resulting in the widening of the supply-demand gap.

The US, Australia, India and Japan already formed a QUAD alliance to counter China in the Indo-Pacific region. In the recent annual meet, the countries signed the pact to make the semiconductor supply chain more diverse. Japan has previous experience in manufacturing semiconductors, Australia can provide the minerals required for producing semiconductors, and India has the skilled workforce needed for the semiconductor industry. With capital and research facilities, the USA ensures the alliance's success.

The Semiconductor Industry Association has recently announced a USD 80 billion investment in the US through 2025. This consists of the upcoming USD 17 billion Samsung factory in Texas and Texas Instruments investing up to USD 30 billion in Texas.

In addition, the US recently passed the "CHIPS and Science Act of 2022" to support US semiconductor manufacturing. The USD 52 billion packages under this act aim to attract companies to manufacture semiconductors in the US. The USD 39 billion is aimed towards providing financial assistance to companies looking to build a manufacturing plant, and USD 11 billion are supposed to be allocated towards research and development.

As per ChemAnalyst pricing intelligence, if the country producing 63% of the global semiconductors stops manufacturing, the situation will be so severe that it will take decades to recover. However, if the conflict escalated and war broke out in the South China sea, we would observe a steep surge in the prices of electronics such as laptops, mobile phones, etc., within the short term.

At the same time, the inversion impact will follow towards the raw materials and upstream commodities in the long run across several industries as sectors like automotive, computation & data storage, and wireless are accountable for driving 70% growth of the manufacturing industry in this decade. In addition, the price gap between the raw materials, intermediate products and finished products will widen due to the imbalance in the supply-demand outlook.