Why are Semiconductor chips essential?

According to a Moody’s analyst, it’s a question of national security” for more countries to develop their semiconductor chips, which are in limited supply globally.

Memory chips are essential in the manufacture of a wide range of items. They can find in cellphones, gaming consoles like the PlayStation 5, household appliances such as refrigerators and washing machines, alarm clocks, and even automobiles. They also utilize data centres, which house a large number of computer servers.

I think the fundamental issue is that new supply is difficult to come by, and the rise in demand is not going to decrease anytime soon, Timothy Uy, an associate director at Moody’s Analytics, said on CNBC’s Squawk Box Asia on Monday. Companies, I believe, are adjusting on both the supply and demand sides. Governments are also getting in on the act because they see it as a question of national security in some ways, he added.

Semiconductor chips are ubiquitous; many goods would not function without them. The auto sector is already feeling the effects, as carmakers forces to halt production due to a global chip shortage. According to some reports, the chip scarcity could extend until 2023.

Global chip shortage

In a note last week, Uy warned that manufacturing semiconductor chips is a sophisticated, capital-intensive process that takes weeks to complete. He claims that it takes much longer to deliver them.

He noted that new supplies cannot develop instantaneously — and that it may take years for fresh supply to come online since factories must be built and outfitted with the necessary technologies.

Each generation of semiconductor chips has a unique manufacturing process. Because newer chips offer higher margins, significant manufacturers have more motivation to invest in their production rather than divert resources to boost capacity for earlier generation chips, according to Uy.

That is one of the reasons why the auto sector is struggling, he noted. Cars require thousands of mostly older-generation processors, whereas smartphones and other devices require a few newer ones.

Nonetheless, Uy told CNBC that much fresh supply is coming online as significant chipmakers, such as Taiwan Semiconductor Manufacturing Company, Samsung Electronics, and UMC, are investing capital in building new plants.

Countries boost chip supplies

Governments have committed to capital spending and are exploring measures to boost chip manufacturing capacity and build local supply networks that can avoid bottlenecks.

South Korea, for example, has planned a $450 billion initiative that includes business investments through 2030. It has also increased tax breaks to make its chipmakers more competitive.

China has established multibillion-dollar national funds to invest in domestic chipmakers as it seeks to catch up with the United States, South Korea, and Taiwan.

The United States has passed a technology and manufacturing bill that contains $52 billion in funding for semiconductor research, design, and manufacturing activities. The European Union is also willing to spend extensive financing on expanding the EU’s semiconductor manufacturing.

According to Uy, government engagement might help level the playing field and reduce some of the shortage pressure, remarkably the price of memory chips, because only a few global corporations dominate the supply chain.